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Private Market Considers Bolting From Flood Insurance

WASHINGTON ( TheStreet) -- Private insurance companies participating in National Flood Insurance Program are reconsidering their participation after Congressional stalling and massive losses are putting its future in doubt.

"Every insurer operating in America today has to have the money to pay for the claims they take on," says Robert Hartwig, president of the Insurance Information Institute. "This business shouldn't be run any differently."

The flood program is overseen by Federal Emergency Management Agency (FEMA) which is currently seeking a $19 billion taxpayer bailout. The program, which insures 5.6 million properties nationwide, offers flood insurance at discount rates and has been hit hard by losses following Hurricane Katrina.

While federally funded, private insurance companies sell the flood policies and then are "reimbursed" by the government. However, over the past year lawmakers in Washington have stalled on renewing flood insurance legislation and private insurance companies had to front the cost of policies. The program has lapsed four times so far this year.

The lapses, coupled with a massive shortfall, are giving private insurance companies pause.

"There is a real political risk associated with the program because the last two lapses were so long," says Ben McKay, senior vice president of federal government relations for Property Casualty Insurers Association of America. "I had several companies call me to ask what that political risk was. Many are weighing whether or not they want to stay in the program, or acquire other companies that write the FEMA policies."

In June State Farm Mutual Insurance Company announced that it would no longer write flood insurance policies. The company handled over 800,000 flood insurance customers across the country--40 percent of them in Florida.

Other large companies participating in the program include Allstate (ALL - Get Report), The Hartford (HIG) and Travelers (TRV - Get Report). One of the companies weighing that risk is Fidelity National Property and Casualty Insurance. Fidelity CEO Mark Davey spoke to Congress in June about risks associated with the program and its need for reform.

"As a company, after you pay the flood the claim, then you are out that money until FEMA reimburses you," says McKay. "If the lapses get longer this is a real problem for insurers."

As USA TODAY reported, the government program has been running deeply in the red. This is because politicians haven't wanted to bailout the program until it was reformed. The only problem is that it has remained on the Congresses to-do list since Hurricane Katrina took place.
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