Among the challenges cited in the report that would confront private insurers interested in writing more flood coverage:

Subsidized flood premiums for some 20% of NFIP-insured properties, which not only might have compromised the program's solvency, but also may have exacerbated the exposure by facilitating construction in flood hazard zones.

Repetitive loss properties, which accounted for one-in-four NFIP claims paid between 1978 and 2011.

The relatively low take-up rate for flood insurance, even among homeowners with federally-backed mortgages who are mandated by law to buy the coverage.

Adverse selection, in which few property owners facing only a moderate chance of flooding buy a policy, thereby undermining the program's spread of risk. 

The likelihood of federal disaster assistance for victims of flooding, which may have prompted many property owners to pass on buying insurance and take their chances on getting a government grant or loan if a worst-case scenario comes to pass.

Washington tried to address many of these issues when Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012, which included measures to gradually phase-out subsidized rates as well as update flood maps so risk could be more accurately assessed and priced accordingly.

However, once the pricing provisions of Biggert-Waters began to be implemented, there was a political backlash in the most highly-exposed states, with state and federal lawmakers being inundated with complaints about rate hikes that were rendering the coverage unaffordable, while undermining property resale markets. 

In response, the U.S. Senate passed a measure in January to delay rate hikes for four years while an affordability study was completed, but a counterproposal in the House of Representatives prevailed which kept the transition to risk-based rates in place, but limited the scope and slowed the pace of premium increases. The new measure was signed into law by President Barack Obama last month.

The decision to delay, limit, and even roll back efforts to increase prices to risk-based levels is likely to raise red flags for private insurers and reinsurers that may have been open to the idea of entering the flood insurance market. The Government Accountability Office noted this potential repercussion in a January 2014 report on strategies to increase private sector involvement.

"…[D]emonstrating the political will to charge full-risk rates within NFIP could signal to private insurers a greater likelihood of being allowed the freedom to charge adequate rates in a private flood insurance market, thus encouraging their potential participation," reported GAO, while any move in the opposite direction "would increase private insurers' skepticism about the feasibility of participating…"

Still, even though these challenges may seem daunting for carriers interested in writing flood insurance, they are not necessarily insurmountable. Indeed, a few private carriers have already entered the market in certain states, such as Florida, and local legislative efforts are underway to encourage more insurers to join in, perhaps on a surplus lines basis.

In addition, Deloitte's report outlines a number of ways in which primary insurers, reinsurers and capital market investors could be eased into the flood insurance market—options which are not mutually exclusive. These include initiatives in which:

Private carriers would serve as primary insurers for many policyholders, with the federal government acting as reinsurer.

The federal government continuing to be the predominant primary insurer, but limiting taxpayer liability by purchasing reinsurance from private carriers.

Spreading flood exposures across the capital markets through securitization, via the sale of catastrophe bonds.

We elaborate on 10 potential privatization options in our report, and will detail them further in our next blog on PC360 later this month.

The bottom line is that in theory having the private market—whether primary insurers, reinsurers, the capital markets, or some combination of all three—pitch in to take on significantly more flood exposure could be a win-win for policyholders and taxpayers as well as the insurance industry. However, that vision can only be realized if government and the private sector can work together to create the conditions to make such an effort mutually beneficial.