NEW YORK (Thomson Reuters Regulatory Intelligence) - U.S. insurers are making their case to state regulators to help ease federal policy restrictions to make it easier for companies to enter the flood insurance market. Their pitch involves a plan to coexist with the National Flood Insurance Program (NFIP) and help cover gaps in federal coverage, as they try to alleviate fears of a complete replacement of the federal program by private carriers.
Though proponents of a private flood insurance market have advocated the removal of regulatory barriers from time to time, the debate has gained prominence as Congress faces a deadline to reauthorize the existing national program by Sept. 30. With its one-size-fits-all policy and mandatory coverage requirement for risky zones, the program collected over $4 billion in premiums in 2016 but has also racked up $25 billion in debt as a result of costly storms and hurricane claims in the last two decades. With the size of the damage caused by Hurricane Harvey and the resultant losses yet to be measured, it is unclear how much more pressure the program could face in the upcoming months.
The National Association of Insurance Commissioners (NAIC), comprising U.S. state insurance regulators, has urged Congress to reauthorize the current federal program(here) for a period of 5 years and avoid short-term extensions to protect the stability of the insurance, housing, and lending markets. The NAIC has also repeatedly urged Congress to consider private entrants into the market to complement the federal program.
At an NAIC meeting in Philadelphia earlier this month, private carriers urged state regulators to tell Congress it was important to expand consumer choices by increasing access to the private flood insurance market. Though private flood insurance options are already available in the market, it is rarely used due to policy barriers. For instance, some federal lenders are reluctant to provide mortgages to property owners with private flood risk coverage.
Typical renters and homeowners’ insurance does not include flood coverage. Private insurers have traditionally shied away from the flood market that was considered ‘high-risk’ due to an imbalanced risk pool leaning heavily toward coastal areas and riskier zones. A perceived threat to the financial stability of private insurers from high risk-flood coverage has also troubled federal policymakers.
However, the availability of more data and technology is now enabling private carriers to assess risk more accurately and model and price products in an economically viable manner. The last few years have seen an increase in flood insurance products from surplus-lines insurers -- companies that typically offer coverage for products considered unique or too high-risk for traditional insurers.
Though limited in size and scope, the profitability demonstrated by some of these products in the last few years has given state regulators the confidence to begin advocating for more private capacity at the federal level. Underwriters now use innovative underwriting techniques including laser-based and satellite imaging that is more accurate and provides more data than the NFIP may include in its own risk assessment.
Insurers can use cutting-edge technology and the extensive data to provide customized products to consumers based on their location and other factors, said John Dickson, president of NFS Edge insurance agency, an affiliate of Aon National Flood Services.
Speaking to Thomson Reuters, Dickson said technology can enable the simulation of hundreds of thousands of flooding events to model risk accurately. Technology that is constantly vetted and updated by teams of hydrologists, geologists, and other scientists can keep risk models fresh and can even help study rising sea level trends to mitigate the impact of coastal flooding linked to climate change.
Some private underwriters do not need consumers to provide certain property-related documentation like ‘elevation certificates’(here), as they get enough data on the home from the tools they have, the insurers told the NAIC panel at the meeting.
State regulators have been open to the idea of private flood insurance, as surplus-lines insurers are subject to state regulatory policies on solvency and licensing.
The NAIC has also developed a requirement for insurers to include a line item in their annual financial statements highlighting their private flood insurance activity. That data would provide state regulators with an overview of the size of the private flood insurance market and insights into the market as it grows, the NAIC has said. Consumers may also benefit by being able to take disputes to a state regulator.
However, fears have also persisted at the federal level over a potential loss of business for the already debt-ridden NFIP. Insurers discounted this possibility and told state regulators that the flood insurance market had adequate room for both the private and NFIP market, by catering to a larger section of the population.
“It is also important to keep in perspective that the private flood market is growing but still very small compared to the NFIP. We think it will continue to grow strongly over the next few years but we do not see that it will explode and be able to take over the NFIP or replace it anytime in the near future,” said Sabrina Miesowitz, Associate General Counsel, Lloyd’s America - a surplus-lines insurer.
Private insurance can also help cover low-risk flood zones which do not need mandatory NFIP coverage, even though they are not completely immune to flood risk. That could help prevent damage and losses from unexpected rains such as those that caused extensive flooding at Baton Rouge, Louisiana where 83 percent of the population was uninsured in 2016, Dickson told regulators at the meet.
Insurance from private carriers can also address coverage gaps in the NFIP, like basement protection, or even provide additional coverage in cases where consumers feel the federal program is inadequate, like assistance with rehabilitation efforts.
“It’s not one or the other. We’re not looking to take business out of the NFIP pocket, but we’re trying to reach more customers across the country,” Dickson said in an interview. “NFIP is a critical component of the basket of tools an agent needs to provide coverage to customers and individualized solutions. For us, it is about creating as many options as possible for the customer.”
State regulators and insurers are urging Congress and the Federal Emergency Management Agency (FEMA) to share past NFIP data to help the private market accurately assess flood risks. Shared disaster management could help the federal program with its mounting debt as subsidized premium rates and several years of catastrophic losses have led to the need for NFIP to borrow from Treasury to pay claims.
A bipartisan bill easing restrictions on the private flood insurance market, titled the Flood Insurance Market Parity and Modernization Act sponsored by Republican Senator Dean Heller and supported by state regulators and the insurance industry alike, has been introduced in Congress but is yet to be taken up for consideration this year.
Currently, homeowners obtaining a federally-backed mortgage in certain flood zones are expected to be covered by the NFIP. This bill is expected to ease such restrictions on property owners and increase state regulatory authority over private insurers and their offerings.
An increased involvement of private insurers in flood insurance would provide more choices to all consumers making flood coverage more accessible and perhaps less costly, the bill and its proponents have argued.
There is also a proposal to include flood insurance in every standard homeowner’s insurance policy to protect private carriers from adverse selection, or a risk pool skewed toward loss-making clients.
(Antonita Madonna is a correspondent for Thomson Reuters Regulatory Intelligence, based in New York.)
This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Aug 23. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters