A U.S. Senate committee today conducted a hearing titled “The Flood Insurance Claims Process in Communities After Sandy: Lessons Learned and Potential Improvements,” where lawmakers had a chance to listen to the insurance industry’s lessons learned from Superstorm Sandy and potential areas of reform.
The hearing was conducted by the Senate Committee on Banking Subcommittee on Housing, Transportation, and Community Development. It discussed the claims process for homeowners and businesses administered by the National Flood Insurance Program (NFIP) and Write Your Own (WYO) companies after Sandy struck the East Coast in 2012.
To date, the NFIP has paid out more than $8 billion in flood claims resulting from the storm. It is estimated that Sandy was responsible for a total of $65 billion in damage in the U.S., second only to Hurricane Katrina in total losses from a tropical system.
The Independent Insurance Agents & Brokers of America — the Big “I” — commended the Senate committee for investigating the NFIP claims process after the major damage caused by Sandy.
“While there is always room for improvement, we believe that for the most part the NFIP, and WYO’s specifically, did an admirable and effective job in administering the claims process in the face of significant challenges,” said Charles Symington, Big “I” senior vice president for external and government affairs.
“The numbers tell the story and, in fact, 99.6 percent of all claims are successfully closed,” Symington said. “It is important for consumers to know that if they are not satisfied with their claims handling, there is a mechanism in place for them to file an appeal through FEMA.”
The Senate committee members heard testimony from Property Casualty Insurers Association of America’s (PCI) Personal Lines Vice president Don Griffin. PCI members include two-thirds of the WYO insurers that partner with FEMA to administer the NFIP.
“Write Your Own (WYO) insurers’ first priority is our policyholders,” said Griffin, who also chairs the WYO Flood Insurance Coalition that includes all the primary insurer trade associations and WYOs. “We want a program that works to protect policyholders and that is simple enough for everyone in the marketplace to understand; so that consumers know what they need to buy, agents can explain how the coverage works, and insurers can correctly service the program.
WYO insurers — which serve as third-party administrators for the NFIP for the federal government — face a number of risks. Griffin said insurers with unhappy policyholders face both individual consumer retention risks and reputational risks, particularly since most people are unaware that the rules for determining most flood claims are set by the federal government and insurers don’t have a direct risk-bearing interest.
He added that administering and marketing the flood program is very complex and expensive, and the number of insurers willing to do so has declined significantly in recent years. “Many WYOs have determined that the reputational, legal, and financial risks are too great,” he said. “Unfortunately, as fewer insurers market flood insurance, fewer consumers will purchase flood insurance.”
Griffin highlighted several lessons learned from Sandy and potential areas of reform in his testimony:
“In the immediate aftermath of a natural catastrophe it is critical for local, state, and federal officials to coordinate their efforts to get basic services up and running as quickly as possible so that people can get back to their homes and businesses to begin remediation and rebuilding,” PCI’s Griffin said.
He said insurers need to be at the table during pre- and post-disaster emergency planning and coordination. And, he added, it is also essential to the rebuilding process that local law enforcement and government officials allow insurers and claims adjusters into damaged areas as soon it is safe — at least as soon as property owners are provided access.
Also, he said, one of the issues that arose with Sandy was the lack of available flood insurance adjusters, and that can delay the claims settlement and the rebuilding process.
“Most flood insurance adjusters are located in areas that frequently flood,” Griffin said. “Often states implement reciprocal recognition of claims adjusters from other states to help.”
“Often the state insurance department grants such access, with the proper credentials, but sometimes it is difficult, given the impact of the event and the number of requests, to process the necessary paperwork needed in a timely manner, leading to delays in responding to claimant needs,” he said.
“PCI also supports federal legislation to require more reciprocal claims adjuster recognition,” Griffin said.
Flood Insurance Advocate
He also spoke about the office of the Flood Insurance Advocate, which was established by the Homeowners Flood Insurance Affordability Act (HFIAA). “In light of the considerable Congressional changes to the federal flood insurance program last term through the Biggert-Waters Flood Insurance Reform Act and this year in the HFIAA,” Griffin said, “WYOs hope that the Advocate can be a central location to respond to inquiries by consumers, Congress and the media.”
“We understand that the NFIP has established the goal of filling that position by the end of this year and hope the Administrator will be able to find candidates with an understanding of mapping, flood insurance, and claims – that will all be needed for the Flood Advocate to best serve consumers and the NFIP,” Griffin said.
In addition, Griffin said, “preparation is a key factor in minimizing financial loss after a natural catastrophe.” He said strong, uniform statewide building codes that are regularly updated play a significant role in reducing the risk of injury or death to homeowners during a natural catastrophe.
“Less property damage following an event reduces the need for federal disaster aid, and can help expedite a community’s recovery after a natural catastrophe,” he said. “PCI promotes strong building codes and responsible land use policies, which are crucial for all stakeholders, to promote public safety and to be as prepared as possible for the next hurricane, tornado, or flood disaster.”
Private Sector Participation
Griffin said the increased complexity of the NFIP — along with increased costs for low-risk, voluntary NFIP policyholders — also risk decreasing NFIP participation. Together, these and other pressures could lead to additional adverse selection in the future, increased taxpayer exposure and the need for additional federal aid following the next major catastrophe, he said.
“Growing the number of both policyholders and insurers will benefit both taxpayers and the NFIP,” he said. “PCI also supports increasing private sector involvement in flood insurance.”
The Biggert-Waters Flood Insurance Reform Act included a provision expressly authorizing FEMA to obtain reinsurance from the private market, he noted. “PCI looks forward to working with companies and regulators to make certain consumers and other marketplace participants are properly educated and protected as this area develops.”
Program Growth and Risk Spread
Insurers participating in the WYO program are responsible for helping administer more than 80 percent of the NFIP business, he said. But despite continued expensive education and outreach efforts by WYO companies, the number of homeowners and businesses purchasing flood insurance protection has peaked at about 5.5 million policyholders.
“This level of insurance protection is far below the needs of vulnerable consumers,” he said. “Future storms will continue to expose gaps in both the number of consumers who are uninsured for flood risk as well as the many families and businesses that are underinsured for their exposures.”
Consumers need to be educated about the importance of having flood insurance and encouraged to continue purchasing it, he said. Likewise, more needs to be done
to assure that the Biggert-Waters Flood Insurance Reform Act provisions designed to incentivize lenders to require flood coverage are having the intended effect.
Griffin also said that PCI will be hosting a national flood conference next year in Washington, D.C., with FEMA and all of the different flood insurance stakeholders to discuss how to simplify and improve the flood program in advance of the next Congressional reauthorization cycle. “We look forward to working with you on your concerns and would welcome your participation in our national conference,” he said.
Source: The Property Casualty Insurers Association of America, The Independent Insurance Agents & Brokers of America