WASHINGTON—Congress' latest failure to give the National Flood Insurance Program a long-term extension is causing headaches for some risk managers.

The program, which provides up to $500,000 in property coverage for commercial structures and $500,000 in contents coverage, is used by some risk managers to provide a first layer of coverage on which larger limits can be stacked. But the NFIP, which dates back to 1968 as a means to encourage better land use by minimizing the exposure of property to flood damage, has become a political football over the past several years.

A major reason is that the House and Senate have been unable to agree whether the program should be expanded to include windstorm coverage. The House has approved legislation that would require the NFIP to offer windstorm coverage, a move that the property/casualty insurance industry opposes. The Senate has refused to add windstorm coverage.

The result has been a series of short-term extensions of the program, the most recent of which will expire Feb. 28.

“Unfortunately, it's hard to see the current Congress breaking the logjam that's preventing meaningful reform of the NFIP,” said Jimi Grande, senior vp in the Washington office of the National Assn. of Mutual Insurance Cos.

He blamed efforts by some in the House to add windstorm coverage and the fact that Congress has been dealing with issues such as health care and financial services regulatory reform for the lack of long-term action.

“We hope that it doesn't take another disaster to wake them up to the importance of creating a long-term, financially stable NFIP,” Mr. Grande said.

“We're going to go through this drill again,” said Melissa Shelk, vp-federal affairs for the American Insurance Assn. in Washington. “While the House may turn its attention now to try to craft a flood reauthorization bill, the Senate is just now getting into their real debate on financial services regulatory reform, which is going to take precedence.”

Ms. Shelk said while the program is aimed primarily at homeowners, “a lot of commercial accounts buy the NFIP” coverage, therefore, the uncertainty affects them as well, she said.

Risk managers acknowledge the uncertainty.

“As a risk manager, I'm looking for consistency where I can find it in our insurance program,” said Ron Hayes, risk manager for the Calcasieu Parish School Board in Lake Charles, La., and president of the Alexandria, Va.-based Public Risk Management Assn.

“I need to advise my superiors the best possible way we can maintain a plan in place for our risk exposures. If there's some uncertainty and instability, particularly in regard to flood insurance programs, it's very important for us to have all of our ducks in a row with the threat of hurricane season coming every summer. It's unsettling to know that the plans we have in place may be extremely short-term,” Mr. Hayes said.

The uncertainty often means that for commercial buyers who purchase excess coverage, limits imposed by the NFIP “essentially become a deductible,” said Donald Griffin, a vp at the Property Casualty Insurers Assn. of America in Des Plaines, Ill. “Should there be a gap and there's a loss, that could be a very expensive proposition for the policyholder.”

Short-term fixes for the NFIP certainly cause concern, said Chuck Magazine, risk manager for the city of Boynton Beach, Fla. But he added that the “NFIP is a wonderful program, but it doesn't go far enough.”

First phase

Mr. Magazine said he views flood insurance as the first phase of a process that would lead to broader natural catastrophe insurance for other perils. “We've been trying to get people interested in the second phase—which is natural catastrophe insurance.”

Many risk managers expect the short-term fixes to continue, said Nancy Sylvester, a Baton Rouge, La.-based managing director in the public entity and scholastic division at Gallagher Risk Management Services Inc., a unit of Arthur J. Gallagher & Co.

“All of my clients—and I insure mainly public entities—expect this to happen. They don't view this year as any different as last year or the year before. Everything's a little up in the air. It is what it is,” she said.

Mr. Griffin noted that the NFIP is about $18 billion in debt, and that the property/casualty insurance industry would like to see reforms to the program, such as making it actuarially sound and mandating that properties behind levees and dams buy the coverage.

“The most important thing for us is creating a financially responsible program that charges actuarially sound rates to provide consumers with the product they need,” said NAMIC's Mr. Grande.

Copyright © 2010 Crain Communications, Inc.