Author Archives: Nathan Bacchus

About Nathan Bacchus

Nathan Bacchus is senior government affairs manager at theRisk and Insurance Management Society (RIMS).
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FEMA Releases Premium Guidelines for “High-Risk” Flood Zones

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Insurers have historically used FEMA’s Specific Rating Guidelines to calculate premiums for properties at high risk of flooding, particularly those built with the lowest floor elevation below the Base Flood Elevation (BFE). Prior to the National Flood Insurance Program’s extension in 2012 owners of these properties received subsidized rates well below the true flood risk. Many of these properties will now be rated using the Specific Rating Guidelines which FEMA released to the public last Wednesday.

The use of these new guidelines will undoubtedly result in significantly higher premium rates for many property owners in high risk zones. In its report FEMA stated that people whose properties are four feet below base flood elevation will see premiums totaling $95,000 over a 10-year period. These rates have many property owners and elected officials speaking out strongly against the reforms. Members of the Louisiana congressional delegation, including Senator Mary Landrieu (D), Rep. Bill Cassidy (R), and Rep. Cedric Richmond (D), have urged Congress to pass legislation that will delay or lower the rate increases. “I remain very concerned about the impacts these rate increases will have on homeowners and small businesses throughout our nation,” said Sen. Landrieu. Michael Hecht, president and CEO of Greater New Orleans, Inc., went every further stating that “flood insurance will be unaffordable for home and business owners across coastal and riverine America.”

In its guidelines FEMA did provide suggestions for property owners affected by the rate increases which include elevating the property above base flood level; however, this is often easier said than done. Flood insurance policies in the northeast offered an extra $30,000 to allow owners to elevate properties that had been damaged during Hurricane Sandy, but many property owners found that this amount would not cover all of the costs associated with elevating an entire property several feet above its original base. Other FEMA suggestions include adding flood vents to the property’s foundation, taking on higher deductibles, and working with local officials about community wide mitigation strategies.

The NFIP has become a major point of contention in light of the program’s fiscal crisis which was only exacerbated by Hurricane Sandy in 2012. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) went as far as to vow that his committee would take up legislation to privatize the flood insurance market. The program is sure to draw more and more attention as rate increases go into effect October 1, 2013.

TRIA: Not Just a Big City Issue

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The following is an excerpt from the RIMS executive report “Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.” The report is available for download here.

Opponents and skeptics of TRIA express concern that the program is tailored to benefit only major metropolitan cities such as New York City, Chicago, San Francisco, etc.; however, major cities are not the only ar­eas facing the very real threat of terrorism, as the 1995 Oklahoma City bombing made evident. Additionally, while the recent attacks in Boston occurred in a major city, they did not occur in a major financial center or area that would be seen as exclusive to such a city. They occurred during a marathon race and city celebration; similar events take place throughout the country on almost a daily basis.

On January 31, 2012, the National Consortium for the Study of Ter­rorism and Responses to Terrorism (START) released its “Hot Spots of Terrorism and Other Crimes in the United States, 1970 to 2008” report to the Department of Homeland Security. This report found that more than 2,600 terrorist events, defined as “the threatened or actual use of il­legal force and violence by a non-state actor to attain political, economic, religious, or social goal through fear, coercion, or intimidation,” occurred in the United States during those years.

On April 29, 2010, the Heritage Foundation published a list of thirty known terrorist plots that had been foiled in the United States following 9/11. These plot targets included a shopping mall in Columbus, Ohio; gas pipelines in Wyoming; and a federal building in Springfield, Illinois. This again shows that major cities are not the only targets of terrorists.

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On September 8, 2011, The Daily Beast published 10 additional foiled plots that had occurred after April, 2010, one of which was a plot to target Christmas tree lighting in Portland, Oregon.19

These lists and studies are highlighted because they show that major cit­ies are not the only terrorist targets in the United States. Any venue that brings together a large group of people is a potential target for terrorism whether it be a sports venue, a hospital, a school or university, a large commercial building, a utility, place of worship or Christmas tree light­ing.

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Businesses and organizations, whether in New York or Columbus, Ohio, need adequate terrorism coverage and the market stability TRIA provides to manage that risk.

TRIA Advocates Testify Before NYC Council

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On Monday, various industry groups, including RIMS, provided comments to the New York City Council Committee on State and Federal Legislation. The hearing was held to discuss proposed NYC Council resolution 1806-2013 which calls on the federal government to enact a long-term extension of the Terrorism Risk Insurance Act (TRIA).

Congresswoman Carolyn Maloney (D-NY) kicked off the hearing by strongly expressing her continued support for the program. Rep. Maloney is a co-sponsor of legislation that would extend the TRIA program for an additional five years beyond December 31, 2014. She urged councilmembers to take an active role in reaching out to other local governments throughout the country to build support for an extension. Rep. Maloney made it clear that TRIA is not a program for New York City but rather a program that provides stability to the entire nation’s economy.

Rep. Maloney was followed by a panel consisting of the Alliance for Downtown New York, the Real Estate Board of NY, the Partnership for New York City, the Building Owners and Managers Association of Greater New York, and the Council of New York Cooperatives and Condominiums. All five groups expressed strong support for the TRIA program and the potential devastation to New York City’s economy were the program allowed to expire. Andrew Breslaw, vice president of communications and marketing for the Alliance for Downtown New York, argued that billions, possibly trillions, of dollars worth of commercial loans would be in technical default if TRIA is not renewed beyond 2014.

The remaining groups who testified also did so in favor of a long-term extension. These groups included Willis North America, the Council of Independent Agents & Brokers, AIG, and Marsh. Comments submitted on behalf of RIMS reinforced many of the arguments made by the other advocates. “Terrorism is one of those risks that must be considered in today’s world and insurance coverage for acts of terrorism is a necessary component of mitigating losses from a potential event,” wrote RIMS Board and NYC Chapter Member Lori Seidenberg. “Availability and affordability of this coverage continues to be vital to commercial insurance consumers, but perhaps even more importantly, to the economy as a whole.”

The committee did not take a vote on the resolution during the hearing, but it was clear that it will be supported. While New York City’s support of TRIA will come as no surprise, and may not have a huge impact on the Republican-led U.S. House of Representatives, the hearing did serve to bring added attention to the issue at a time when the House appears to have placed it on the backburner. The issue deserves more urgency from the House as the longer the program’s fate remains in flux, the more uncertainty creeps into the market.

Reinsurance Tax Reintroduced in House and Senate

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President Barack Obama’s 2014 budget proposal, released April 10, included a provision that would eliminate the current tax deduction for reinsurance premiums. Now there is legislation that would seek to do the same thing. H.R.2054, sponsored by Congressman Richard Neal (D-MA) and Congressman Bill Pascrell (D-NJ), and S.911, sponsored by Senator Bob Menendez (D-NJ), were introduced May 20, 2013. This marks the fourth time that Rep. Neal has introduced similar legislation.

Rep. Neal believes that foreign-based insurance companies are using affiliate insurance to avoid U.S. tax on their investment income, which leads to an unfair competitive advantage over U.S-based companies. The Coalition for a Domestic Insurance Industry, which represents 13 U.S.-based insurance groups, agrees with Rep. Neal that the current system offers a competitive advantage to foreign-based companies. In a May 21, 2013 press release William R. Berkley, chairman and CEO of W.R. Berkley Corporation, stated that “closing this loophole, staunching the flow of capital overseas and restoring competitiveness for this important domestic industry is a win for all.”

Opponents of this provision were quick to express their opposition. The Coalition for Competitive Insurance Rates (CCIR), which includes the Risk and Insurance Management Society (RIMS), stated that this legislation would “decrease capacity and hike the cost of insurance while also limiting competition in the U.S. insurance marketplace.” In that same press release James Donelon, Louisiana Commissioner of Insurance, added that “this legislation would shift the financial burden of rebuilding following a disaster onto already-strained domestic insurers and their policyholders.” RIMS followed suit with its own release in opposition to the bill. Carolyn Snow, RIMS board liaison to the Society’s external affairs committee, remarked that “this short-sighted legislation fails to realize that if organizations are forced to abandon their offshore counterparts, the financial burden of catastrophic risks would fall on the government and policyholders—an alternative that could shatter this country’s economic vitality.”

Opponents of the tax are supported by a 2009 Brattle Group study of the impact this legislation would have on the reinsurance market. The Brattle Group found that enacting this legislation would reduce the supply of reinsurance in the United States by 20%, thus raising the price of primary insurance by 1.8-2.1% overall. As a result, U.S. consumers would be required to pay $10-$12 billion more per year.

Rep. Neal is no stranger to this issue. He introduced similar proposals in 2008, 2009 and 2011. Those bills failed to make it out of committee, but that doesn’t mean opponents can sleep on the issue. Many expect that tax reform could be on Congress’ agenda for 2013-2014 and the fear is that this provision is picked up as a part of that package. CCIR, its members and other opponents will continue working to educate members of Congress on the negative effects that this bill would have on the insurance industry.

Check out this video from the CCIR for an explanation of the risks associated with a reinsurance tax.