Removing Barriers to More Private Flood Insurance

By | December 1, 2014

A House Financial Services subcommittee recently held hearing to focus attention on legislation sponsored by two Florida representatives who want to encourage more flood insurance sales by private insurers as an alternative to policies sold by the National Flood Insurance Program (NFIP).

The hearing called by the Subcommittee on Housing & Insurance, entitled “Opportunities for a Private and Competitive Sustainable Flood Insurance Market,” focused on H.R. 4558, the Flood Insurance Market Parity and Modernization Act of 2014, introduced in May by Reps. Dennis Ross and Patrick Murphy, both from Florida. The bill would clarify that private coverage satisfies the requirement for purchasing flood insurance under federally-backed home mortgages.

The 1973 Flood Disaster Protection Act mandates that federally regulated or insured lenders require the purchase of flood insurance on properties with a federally- backed mortgage that are located in high risk flood areas. The mandatory purchase requirement did not require that the insurance be provided by the NFIP, however, most flood insurance is.

Purchase Requirement

Private carriers will only write significant flood business if they can charge actuarially sound rates.

The bill by Ross and Murphy would amend the 1973 law to clarify that flood insurance offered by a private carrier outside of the NFIP can satisfy the mandatory purchase requirement. The legislation defines as acceptable a policy issued by a private insurance company that is licensed, admitted, or otherwise approved in the state in which the insured property is located. A policy issued by a non-admitted insurer would also qualify.

The two sponsors contend that encouraging private insurers to enter the government-dominated flood insurance market will create competition and result in better policies and pricing for homeowners.

“Floridians and Americans across the country would greatly benefit from more choices when it comes to flood insurance policies,” said Ross. “More choices can mean better coverage and cheaper policies for homeowners.”

“This bill would get the federal government out of the way of letting Florida foster a competitive market to drive down costs for homeowners,” said Murphy.

According to various experts and studies, the major obstacle to private flood insurance has not been regulation per se but rather the inability of private carriers to compete with the NFIP’s subsidized premiums, prices that have contributed to the NFIP amassing a $24 billion deficit.

The Biggert-Waters Act attempted to address the NFIP’s debt by eliminating certain premium subsidies and phasing in premium increases so that prices more closely reflect the risk of flood-prone properties. However, Congress backtracked on those changes after consumers protested, passing the Homeowners Flood Insurance Affordability Act (HFIAA) that rolled back key provisions of Biggert-Waters.

Private carriers do currently provide some flood coverage, but they generally limit their offerings to commercial policies and excess homeowners coverage above the maximum $350,000 of building and contents coverage provided by the NFIP.

While private (re)insurers have the capacity to provide flood overage, and modeling tools now allow them to price more accurately, they will only be willing to write significant amounts of flood business if they are allowed to charge actuarially sound rates, according to experts and reports.

If and when federal subsidies for flood insurance are reduced and the cost of government provided insurance goes up, the demand for private flood coverage could also rise, said Fitch Ratings in one report.

In Biggert-Waters and the HFIAA, Congress called upon the NFIP to study ways to increase private sector involvement and ordered federal regulators to develop a rule requiring lenders to accept private policies. The Office of the Comptroller of Currency, the Federal Reserve System, Federal Deposit Insurance Corp., the Farm Credit Administration and the National Credit Union Administration are working on a rule.

Agents’ Concerns

According to subcommittee testimony from the Independent Insurance Agents and Brokers of America (Big “I”), mortgage lenders are currently unsure whether private market alternatives satisfy the “mandatory purchase” requirement. As a result, they are either requiring the private policy to look nearly identical to an NFIP policy or simply not accepting private policies.

The Big “I” is concerned about federal banking regulators determining what is considered an acceptable private insurance policy. The group said agents support the Ross-Murphy legislation as a way to “let state insurance regulators determine acceptable flood insurance policies instead of federal banking regulators or the lenders themselves.”

Don Brown, a Florida insurance agent, consultant and former state representative, told lawmakers that the political and regulatory uncertainty surrounding private flood insurance –if private insurance is acceptable, what terms are acceptable, whether federal or state regulation controls — is impeding development of a private market.

“Banks question if the flood policies written by private carriers will satisfy the mortgage requirement for homes located in a high-risk flood zone. Agents are concerned about E&O [errors and omissions] exposure for selling policies that might not meet the federal mortgage requirement and the potential exposure if the agent sells a policy that negatively impacts the insured’s ability to get subsidized NFIP coverage in the future,” Brown testified.

Agents also urged lawmakers to address another issue, namely letting consumers who leave for the private market but later come back to the NFIP keep their NFIP subsidized price.

Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), testified in support of clarifying the lender requirement language, as well as other risk-sharing solutions such as allowing the NFIP to purchase reinsurance or issue catastrophe bonds. But he stressed that the main obstacle to a private market is the lack of risk-based pricing.

“At the heart of this issue is the fact that the NFIP does not charge rates that match the risk a property faces from flooding,” said Grande. “As long as that continues to be the case, the program will continue to go deeper and deeper in debt to the taxpayers, and the marketplace for private-sector flood insurance will continue to struggle to develop. Private insurance companies can’t borrow billions from the Treasury, and they can’t compete with a government program that charges significantly less than the private sector would need to in order to offer policies.”

A recent government report found that while new technologies and a better understanding of flood risk may have increased private insurers’ interest in providing flood insurance, the main obstacle remains political and consumer resistance to full cost-based pricing as reflected by the rollback of the rate increases called for under the Biggert-Waters.

The delay of Biggert-Waters “may reinforce private insurers’ skepticism that they would ever be permitted to charge adequate rates and make their participation unlikely in the foreseeable future,” the Government Accountability Office (GAO) report concluded.

In July, Florida enacted legislation to encourage private insurers to offer flood insurance. Private insurers can offer standard coverage mirroring the NFIP policies and three enhanced coverages.

The private industry warned that the new law would not by itself result in a viable market in the near future although there have been a few breakthroughs

Homeowners Choice Property and Casualty Insurance Co. began offering a flood insurance endorsement for its existing 140,000 homeowners policies at rates comparable to what NFIP charges.

The Flood Agency, backed by the surplus lines insurer Lloyd’s Private Flood, was one of the first entities to step forward to sell private flood insurance in Florida. The agency expanded to 15 states and began making it available to commercial risks. Nine months after it launched, the agency stopped writing new business in five counties in order to manage its exposure.

“We currently insure more than $250 million of property value,” said Evan Hecht, president, at the time. “Too much of that is in those five counties.”

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