Reinsurance Surplus Subdues the Premium Tide

The reinsurance industry has reached its highest surplus in history – about $515B.Leader's Edge logo

This is despite the fact that 10 of 12 of the nation’s most costly storms happened in the past decade.

To find out why, check out my most recent Leader’s Edge article, “Survivor: The past decade set natural disaster records, yet most carriers went unscathed and its sidebar, Could Flood Insurance Go Private?

The primary reason for the reinsurance industry’s all-time high surplus can be answered by a James Carville quote.

“It’s the economy stupid.”

Thanks to the worst recession in U.S. history and its sluggish recovery, investors are finding reinsurance to be a more lucrative choice than traditional investments, like bonds.

This not only means that CAT reinsurers are handling some of the most expensive weather disaster years in history, but that larger insurers are generating enough investment money to keep premiums from rising as quickly as they otherwise would.

Reinsurance is looking pretty good right now, which is why some members of Congress are looking into potential ways that reinsurance can help underwrite the $22B debt-laden National Flood Insurance Program. (To read more about NFIP, check out my Contingencies article on the subject by clicking here.) That can be challenging, however, given the NFIP’s contradictory goals of providing affordable flood coverage to Americans while reaching toward Actuarial soundness.

I hope you’ll check out my article and let me know what you think.

Staying Afloat: Flood Insurance Is A Taxpayer Burden

Screen Shot 2013-07-01 at 3.58.35 PMThe National Flood Insurance Program (NFIP) is in debt. About $24 billion in debt to be exact. It’s part of the larger debt we taxpayers are carrying because the program cannot collect what it needs to pay flood claims.

But before you get bent out of shape about another tax burden, consider this. The program is in trouble because most Americans are not buying flood insurance or paying premiums as they should. To make matters worse, more major weather events are predicted this year and in the future.

I cover this in my latest article, The Perilous State of Flood Insurance, in Contingencies magazine. Published by the American Academy of Actuaries, it provides a detailed account of the NFIP since Superstorm Sandy and reform signed into law by President Obama last year.

Here’s some highlights.

  • The NFIP, which is part of the Federal Emergency Management Assistance program (FEMA), which is under the Department of Homeland Security, is just one major CAT event away from hitting the debt ceiling that President Obama and Congress extended last January. That CAT could easily happen this hurricane season, weather experts predict.
  • The 45-year-old NFIP exists because the private insurance market cannot afford to offer flood coverage. Private insurers (your State Farms, Allstates and Progressives of the world) would need to double premiums currently paid by NFIP policyholders due to state solvency requirements.
  • Flood damage is way underinsured. Just ask the folks in New York and New Jersey who did not have NFIP coverage. For their policyholders, NFIP covered about $7.2 billion in losses. The insurance industry as a whole picked up even more for commercial property and business interruption coverage. Those who were not covered, did not get a FEMA grant or charitable help were out of luck. Some people are still homeless because they missed the boat on having flood coverage.
  • People do not buy flood insurance for many reasons. They either assume flood protection is covered through homeowners and renters insurance or say they cannot afford to buy it. (My grandmother used to say that if you cannot afford to take care of soemthing, you shouldn’t have it.) Some even hold out hope that they will get FEMA grant money, which of course, are more federal tax dollars at work.
  • FEMA is releasing new flood maps that might be putting your home or commercial building into a flood zone. That’s because climate change means sea levels and major weather events are rising, which puts more of the U.S. population at risk for flood damage. Better measuring instruments are making maps much more accurate as well.I hope you will enjoy my article. Even if you do not read it, I hope you will call your insurance agent and make sure you are covered. It’s the right thing to do.

For more information on insurance and deciding what kind of insurance you need, check out the Insurance Information Institute. They exist to keep consumers informed.

The Perilous State of Flood Insurance can also be found under “Work Samples.”