House Subcommittee Renews Call for Private Flood Insurance

A House Financial Services subcommittee scheduled a hearing for today to focus attention on encouraging flood insurance sold 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 is entitled “Opportunities for a Private and Competitive Sustainable Flood Insurance Market.” The afternoon hearing will focus 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.

Those scheduled to testify included Steve Ellis, vice president, Taxpayers for Common Sense; Jordan N. Gray, senior vice president and general counsel for WNC Insurance Services, a broker that helps lenders place flood insurance; and Don Brown, a Florida insurance agent, consultant and former state representative.

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 areas at high risk of flooding. The mandatory purchase requirement did not require that the insurance coverage be provided under the NFIP, however, most flood insurance is provided by the government program.

H.R. 4558 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.

Supporters 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 sector flood insurance has not been regulation per se but rather the inability of private carriers to compete with the subsidized premiums offered by the NFIP, prices that have contributed to the NFIP amassing a $24 billion deficit.

The Biggert-Waters Act was an attempt 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 insurance carriers do currently provide some flood coverage, but they generally limit their offerings to commercial flood policies and excess homeowners flood coverage above the maximum $350,000 of building and contents coverage provided by the NFIP.

While private (re)insurers have the capacity to provide coverage for flood risk, and sophisticated 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 industry 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 in the market and ordered federal regulators to develop a rule requiring lenders to accept private flood policies. The Office of the Comptroller of the Currency, the Federal Reserve System, Federal Deposit Insurance Corp., the Farm Credit Administration and the National Credit Union Administration say they are working on a rule.

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 and so are either requiring the private policy to look nearly identical to an NFIP policy or, in many cases, simply not accepting private policies.

The Big “I” is concerned about these federal banking regulators making a rule 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.”

Florida consultant Brown said 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 the 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.

The 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.

Bankers acknowledge there are difficulties accepting private policies but they point to the insistence by the Federal Emergency Management Agency (FEMA), which manages the flood insurance program, that private policies meet certain criteria and a lack of clear guidance from regulators as the reasons.

“There is no ‘standard’ private flood policy. Many private flood policies are surplus lines insurance policies that have tailored coverage and pricing to fit the risk; therefore, the coverage and forms do not mirror those of a standard NFIP policy. Other private policies are admitted products, but because they are designed by their carriers to compete with NFIP policies by offering greater limits, broader coverage, or more coverage features, their coverage and forms also differ from an NFIP policy,” the American Bankers Association ABA) said in testimony.

The ABA said that while Congress has made clear that private insurance should be an available alternative to the NFIP, the mechanics of ensuring that such coverage is available and utilized have proven complicated.

“The intersection of state regulation of insurance broadly, federal regulation of the NFIP, and bank compliance examination have made it clear that further clarification and guidance is needed. H.R. 4558 provides a clear and elegant solution to the questions that have arisen,” the banking group said.

Jimi Grande, senior vice president of federal and political affairs for he 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 Grande 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 obstacles to the private sector getting involved include political and consumer resistance to full cost-based pricing of flood risks, a resistance demonstrated 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 designed to encourage private insurers to offer flood insurance. The statute allows private insurers to 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 and provide private flood insurance in Florida. The agency, located in Gainesville, expanded to 15 states and began making it available to commercial risks and apartment buildings. Nine months after it launched, the agency announced it had to stop writing new business in five counties in the Tampa Bay region in order to manage its exposure.

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