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Private Market Considers Bolting From Flood Insurance

Congressional bungling is pushing out the private sector.
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) -- 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


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The Hartford

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. One of the companies weighing that risk is

Fidelity National Property and Casualty Insurance

. Fidelity CEO Mark Davey spoke to


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."



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.

Hartwig believes the FEMA will have to be bailed out with taxpayer money again and again until Congress runs the program like an insurance company.

"There is no doubt it would go bankrupt again. What has to happen is Congress would have to overhaul the program to how private insurers operate every day, and price it appropriately and to also build up surplus and build up a cash reserve to cover years where those losses outstrip the premiums," he says.