It’s Still Underwater

In an effort to stay afloat, the National Flood Insurance Program is shifting risk away from the government and onto policyholders and the private market.

Following on the heels of April 1 rate increases and other program changes, Congress is considering legislation to ensure the flood insurance market is open to surplus lines insurers. Together, these modifications create opportunities for brokers to guide their clients toward more stable ground.
Keith Brown, CEO of National Flood Services, which administers and manages more than three million flood insurance policies, says the April 1 rate increase notices will likely generate calls to agents and brokers and some movement from the NFIP into the private market.

“There are some pretty significant rate increases out there,” Brown says. One of particular note to commercial agents is the 25% rate increase FEMA is implementing on policies for non-residential business properties.

The rate increases could spur more movement toward surplus lines insurers, which is one of the reasons the legislation under current consideration—the Flood Insurance Market Parity and Modernization Act—is so important.

“I think it’s an opportunity for the agents to touch base with the client,” Brown says. “Because of these price increases and the surcharges, private industry is getting much more involved in flood. It’s going to generate more options for the consumer and the agents beyond the NFIP program. While there could certainly be some attrition of NFIP policies, that doesn’t necessarily mean the agent has to lose the business.”

Shifting the Risk

The National Flood Insurance Program, created in 1968 to mitigate rising taxpayer costs for flood disaster relief, provides federally backed flood insurance in communities that agree to enforce floodplain management plans that meet federal requirements. Flood insurance is required for owners of property in high-risk areas if they have a mortgage from a federally regulated or insured lender.

NFIP was intended to be self-sufficient, but insured losses from Hurricane Katrina and Superstorm Sandy alone topped $24 billion, and those losses are the primary reason the program had to borrow $23 billion from the U.S. Treasury to stay afloat.

Congress has been tweaking the program for years in an effort to get property owners to take more of the risk. As part of that effort, FEMA has begun remapping flood districts to more accurately rate flood risk. In cases where the new maps result in higher premiums, policyholders can retain their grandfathered rates as long as they don’t let the policy lapse.

Congress passed the Biggert-Waters Flood Insurance Reform Act in 2012 to shift more of the flood risk to policyholders. Biggert-Waters also included language that signaled Congress’s desire to open the flood insurance market to surplus lines insurers.

But some lenders have said they found the language doesn’t specifically say private insurance can be accepted as an alternative to the National Flood Insurance Program. So they have declined to accept policies from surplus lines insurers. As a result, Congress is now considering the Flood Insurance Market Parity and

Modernization Act, which would amend the definition of private flood insurance to ensure lenders accept surplus lines policies and create more options for consumers (and brokers).

Joel Kopperud, vice president of government affairs for The Council, says clarifying that private insurers can issue flood policies will open the door to more business opportunities for surplus lines insurers. Additionally, he says the private market can provide more competition, which should result in more accurate flood risk models and better premiums for consumers.

Pennsylvania insurance commissioner Teresa Miller chairs the National Association of Insurance Commissioners’ Property-Casualty Insurance Committee, which is among several business and insurance groups (including The Council) that support the bill.

“Facilitating increased private sector involvement in the sale of flood insurance will help promote consumer choice and spur competition,” Miller said. “We are finding in many cases that private carriers are willing to offer comparable coverage at substantially lower cost than the NFIP.”

Steven Bradshaw, executive vice president of Standard Mortgage Corporation, testified before Congress recently on behalf of the Mortgage Bankers Association (MBA). He said increasing competition in the market would lower costs and increase the number of at-risk properties that are insured.

“MBA believes increased private sector involvement can also serve to shift some of the burden of post-disaster recovery away from the federal government and to the private sector,” Bradshaw says. “This will limit taxpayer exposure to future flood losses.”

National Flood Services has been preparing for these changes for months, which should be of some benefit to brokers looking to address their clients’ concerns. “We have added significant staff, as well as quite a bit of system integration and automation to help with this process,” says Brown. “It’s literally hitting right now, so the system changes are already there and put in. It’s been quite impactful to us. We’ve added quite a bit of underwriting staff on our processing team as well as customer service. As soon as the policyholder calls the agent, we’re the back end and the support structure for the agent, and they’ll call us and ask us questions as well.

“It’s a lot of work for everybody in the whole ecosystem. I think the question is, is it better off for consumers at the end of the day. Is it good for them to be informed, for example, on their true risk? I think it is.”