Right now in the United States, less than 25% of homes in FEMA Flood Zones A or V have flood insurance, and the vast majority of the policies that do exist are written by the National Flood Insurance Program (NFIP), which is currently USD 23 billion in debt. A bill, recently passed by the House of Representatives and now waiting on the Senate, will make it significantly easier, however, for private insurers to offer flood coverage nationwide.
To understand the subtleties and impact of this legislation, we'll examine the current situation and explain how the pending changes open up the market.
People using federally backed mortgages to buy homes in certain areas at risk from flooding are required to purchase flood insurance, and mortgage lenders are required to accept policies that are 'similar' to NFIP coverage. Many lenders are therefore hesitant to accept private flood coverage unless private policies are written using language that makes them virtually identical to NFIP policies; in some instances, they refuse to accept private policies at all. This has caused private insurers to virtually stop offering flood policies, and thus the vast majority of policies are written by NFIP.
Changing the Landscape
The aforementioned bill, the Flood Insurance Market Parity and Modernization Act (H.R. 2901), stipulates that lenders requiring homeowners with federally-backed mortgages to obtain flood insurance must treat private and federal flood insurance equally.
H.R. 2901 shifts the responsibility of determining what coverage is 'similar' to the NFIP to the state insurance commissioners, who understand policy wording nuance, and are already positioned to protect policy holders. Mortgage lenders would no longer be required to make policy determinations and could simply accept a state insurance commissioner's determination of what is adequate. Policies written by private companies could be deemed acceptable and approved for a state in which a property is located as long as the insurance company is also licensed by that state. This would facilitate private insurers' return to the marketplace.
Should the bill become law, as is expected, insurance companies would be able to expand the coverage endorsements acceptable to banks and provide policyholders with the increased level of protection they have come to expect from standard HO3 policies.
It would also allow the privatization of the NFIP to commence, either through endorsement protection or the addition of a new basic peril: rising water flood. Private insurers can, in many cases, offer more comprehensive coverage than the NFIP, which does not provide full protection to a homeowner in its standard policy:
- basements are not covered
- Coverage D is not provided
- Coverage C is on an Actual Cash Value basis (instead of replacement cost)
Alternately, private insurers may be able to offer comparable coverage at substantially lower rates. The new legislation will provide an opportunity for companies to compete with the NFIP and each other, creating a range of deductible and coverage options from which customers can choose what best meets their needs.
If your company is looking for a new opportunity that can be measured and monitored, privatization of flood insurance may be worth exploring. The AIR Inland Flood Model for the U.S. estimates losses for all potential coverages for inland flood, including basement protection, coverage D, and replacement value for Coverage C. In addition, the model provides loss estimates for on- and off-floodplain flooding, and the ability to monitor/measure aggregations, as opposed to single risk loss estimation. It's a comprehensive tool for evaluating flood risk to help identify locations well-suited for private coverage.
For now, we continue to await the passage of this important piece of legislation in the Senate. You can subscribe to our In Focus blog to make sure you get the latest updates on the progress of privatized flood insurance in the U.S.