Historically, the surplus lines market has served as a supplement to the National Flood Insurance Program (NFIP) and standard market, but the passage of the Biggert-Waters Flood Insurance Reform Act of 2012 caused some confusion in the lending industry regarding accepting private flood insurance, including surplus lines policies.
The Flood Insurance Market Parity and Modernization Act (H.R. 1422/S. 563) will provide clarity for lenders so that they may accept private flood insurance solutions from the private market and the surplus lines market particularly.
The Flood Insurance Market Parity and Modernization Act is intended to preserve the surplus lines market’s ability to provide supplemental coverage and to provide insureds with alternatives and coverage options for difficult-to-place and complex risks that exceed or differ from options available through the NFIP or the standard market. This legislation has support from both the banking and insurance industry, and Wholesale & Surplus Insurance Association (WSIA) has long advocated for its passage in collaboration with other industry trade associations.
The surplus lines insurance market exists to provide coverage for nonstandard risks and for risks that exceed either what the standard market is capable of or willing to underwrite. There are specific situations in which consumers might turn to the surplus lines market to write flood coverage.
These include cases where the property exposure exceeds the $250,000 residential property limit or the $500,000 commercial property limit offered by the NFIP. Or, it includes when homeowners or businesses want cover for replacement cost rather than the actual cash value of their property, want to insure additional structures, want the ability to schedule multiple properties on one policy, or when they reside in communities or zones not eligible for NFIP coverage.
Consumers whose risks do not fit within the terms and limits of the NFIP, or whose risks are declined by the standard market, then look to surplus lines for solutions. It is essential for consumers in those situations to have alternatives.
It is also important to understand that surplus lines insurers underwrite private insurance flood policies primarily in commercial lines and, to a more limited degree, in personal lines. Based on data from nine surplus lines stamping offices, the surplus lines market is estimated to have generated $232.6 million in flood insurance premium in 2017, $49.9 million of which was of primary residential flood coverage, and $24.2 million of which was for excess residential flood coverage. Those figures represent a small proportion of the $44.9 billion surplus lines market and of the $3.3 billion of premium written by the NFIP, but they create important solutions for consumers who need higher limits or enhanced solutions beyond what the NFIP offers.
WSIA believes H.R. 1422/S. 563 is a positive step that would enable the private market to develop as it simultaneously allows the NFIP to focus on properties with repetitive losses and its goal of flood loss mitigation and prevention. The current legislation is a consumer choice bill. It clarifies the definition of private flood insurance for lenders and preserves the ability for consumers to seek policies in the surplus lines market if they choose or need to. But, it does not reduce or limit the ability of the NFIP to offer solutions at subsidized rates. Consumers will still be able to choose the NFIP policy.
WSIA encourages Congress to support the legislation and remains hopeful Congress will take quick action to enact it before the November 30 expiration of the NFIP’s latest short-term extension.
Schaendorf is president/CEO of Insurance House, an MGA brokerage operation based in Atlanta. She currently serves as the president of WSIA.
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