The Changing State of Flood Insurance

July 27, 2015

The U.S. National Flood Insurance Program (NFIP) has undergone many changes and improvements in recent years, starting with the Biggert-Waters Reform Act of 2012. Some of the most notable changes include revising existing rates and updating mapping information,which changed flood classifications for some policyholders.

These changes also translated to large rate increases for some policyholders. The insurance industry saw an opportunity to provide alternative coverage to the NFIP, but it came with some complications. Some state insurance commissioners want private insurers to change policy terms (such as additional replacement cost protection or different deductibles), while others want to retain NFIP terms. Furthermore, banks may not have clear guidance on what is acceptable as flood insurance and may be reluctant to accept policy wording that is not identical to the NFIP's. This uncertainty restricts the ability of the customer to choose private coverage.

Fortunately, insurance companies have several tools at their disposal that were not available historically. In particular:

  • FEMA has been updating flood maps and has converted them into an electronic format, making zonal determination easier for an agent
  • Mapping technology has improved, which allows for an alternative (or updated) view of risk, especially in areas that may not have an updated FEMA evaluation
  • Probabilistic flood modeling provides insurance companies with the ability to manage aggregate exposures and evaluate the impact of different financial structures

To give customers more choice in flood coverage beyond mandated NFIP protection, Representative Dennis Ross (R-FL) submitted the Flood Insurance Market Parity and Modernization Act as a bill to the House on June 25, 2015 (Senator Dean Heller, R-NV, submitted the sister bill to the Senate). Key provisions of these bills include the following:

  • Banks will be allowed to accept flood policies from insurance companies to satisfy mortgage protection requirements
  • State insurance commissioners would approve policy wordings and rates, as is already done for other insured perils
  • Both admitted and non-admitted policies would satisfy the flood insurance requirement
  • The required flood insurance purchase would be lowered to the least of three values: the home value, the outstanding mortgage loan balance, or the maximum NFIP policy limits available

Effectively, these bills would open the door for insurance companies to compete directly with NFIP, upon approvals by state insurance commissioners. Insurance companies would be able to write standalone polices, have proper endorsements, allow customers to choose from a range of deductibles, and provide additional protection above the NFIP, which have plagued adjusters for years.While there is no opposition to the bills, they are unlikely to make it to the floor for voting given the full docket in Congress without the support of the insurance industry.

The evolution of flood insurance regulation is opening up new opportunities for the insurance industry to provide coverage for a peril that has been historically avoided, both because of the inability to compete with NFIP rates and the absence of robust tools necessary to manage the risk. With the increase in NFIP rates and the introduction of probabilistic flood modeling to inform risk-based pricing and accumulation management, the maturation of a private flood insurance market will provide customers with more choice in the protection they purchase for their homes.

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