By the end of 2016, the National Flood Insurance Program that provides critical financial help to victims of devastating hurricanes and other storms was nearly $25 billion in debt, and viewed by many in Congress as inefficient and wasteful.
If the beleaguered federal program was to continue to serve as the insurer of last resort for five million homeowners and businesses, it would need private companies to share the risk through the reinsurance market, something that had never been done.
That’s where Andy Neal of the Federal Emergency Management Agency stepped in, persuading private reinsurers for the first time to assume some potential flood damage liability. The unprecedented effort turned out to be hugely successful. The government paid 25 private insurance companies $150 million in premiums in 2017, and the insurers ended up covering more than $1 billion of the $7.6 billion in claims to policyholders in the aftermath of Hurricane Harvey.
“Neal has done something in government that has never been done before,” said Nicholas A. Shufro, an assistant administrator at FEMA’s Federal Insurance & Mitigation Administration. “Andy led his team in conducting quick and effective market research, increased FEMA’s understanding of what was possible and proactively engaged executives about the potential risks.”
The risks were quite high, with the possibility the government would pay out millions of dollars in insurance premiums and get no return on that investment. Under the terms of the policies, money would not be paid by the private insurers until the federal program had paid out at least $4 billion in claims for a single event.
Neal said the flood insurance program was facing the possibility that its financial exposure would be bigger than it could handle, and decided to trade that uncertainty for some protection. “There was a recognition within our program that we needed to adapt and change,” Neal said. “It is looking at a new way to manage risk.”
Neal had to create a new initiative and get buy-in from his agency and other government entities, including the Department of the Treasury and the Office of Management and Budget. “OMB kept asking, ‘Are you sure you want to do this?’” said Ray Wright, FEMA’s deputy associate administrator.
To seal the deal, Neal also had to provide private insurers with data on the risks of current and past policyholders, while protecting their sensitive financial personally identifiable information, which meant breaking through the government’s need to keep sensitive information private.
Neal’s co-workers and others said his commitment, knowledge and ability to inspire others combined to do what initially seemed impossible. Some describe the father of three as an unassuming guy, like the fictional Clark Kent.
“By day, this guy is an actuary, a spreadsheet guy and a financial expert. And underneath there is Superman,” said Tim Cooke, chief executive officer at ASI Government, a consulting group.
The need for changes in the flood insurance program became apparent after Hurricane Katrina, the massive 2005 storm that killed more than 1,800 people and cost the program more than $15 billion.
“For the first 30 years of our program before Katrina, we had a real risk that was largely unmeasured and was sleeping,” Neal said. “Katrina exposed what the risk looks like.”
Neal said many people thought Katrina was an anomaly. But he and others at FEMA knew that the federal government needed to plan for future massive storms—storms with similar damages and costs.
As an actuary, Neal knows a lot about risks and how to mitigate them. Flood risk is among the most difficult to predict, but anticipating the potential costs is critical, he said. “I love FEMA and I love helping survivors, but on a sunny day, you need to look at the exposure of the program,” he said.
Bringing in private reinsurers was key to reducing the risk to federal taxpayers, Neal said. He is quick to credit co-workers for helping to get the 25 private reinsurance companies to share that risk in 2017, and for securing $1.46 billion in reinsurance coverage from 28 insurers for 2018.
Shufro said Neal is a great motivator and encourages his team members to share their perspectives. “His collaborative leadership drives innovation, and every individual is empowered to come forward with their best thinking and individual strengths,” Shufro said.