Though not common knowledge, private insurers have a rich history of insuring the peril of flood in America. In fact, the National Association of (private) Flood Insurers, assumed 48% of America’s flood risk under the National Flood Insurance Program (NFIP) in December 1977.
The tables turned in March of 1978 when federal administrators nationalized the U.S. flood insurance industry and in the words of the top NFIP federal administrator at the time- “kicked out” the private market.
The result of nationalizing the U.S. flood insurance industry has been a catastrophe all its own. Taxpayers have lost over $40 billion and counting.
The NFIP is once again poised to fuel, rather than curtail its current problems by refusing to abandon two administrative protocols that are anti-consumer and serve to impede access to flood insurance, a position entirely contrary to the NFIP “Moon Shot” goal of doubling U.S. flood insurance coverage by 2023. As NFIP Administrator Roy Wright observed on May 1, 2017, “We need both the NFIP and an expanded private market if we want to markedly increase flood insurance coverage for the nation.”
Small technical changes, big consumer implications
So, what precisely are these seemingly small decisions that go against the NFIP’s own goals and are so injurious to consumers?
First, let’s look at the technicality referred to by the NFIP as “Cancellation Reason Code Number 26.” In 2015, without explanation, the NFIP stopped returning its policyholders’ unearned premium when an NFIP policy was replaced with a private flood insurance policy during the policy term. In October 2018, the head of the NFIP announced the creation of Reason Code 26 as a revision to NFIP processes that would allow an NFIP policyholder to cancel their policy midterm and receive a refund for the remaining, unused portion of their NFIP premium, as is the case with virtually all private market policies.
Unfortunately, in January, when the NFIP implemented the code, they reversed their interpretation of it without notice to allow only for cancellation at renewal or inception date, and then only if the policyholder “did not intend” to purchase the NFIP policy. This implementation not only prohibits consumer choice during a policy term, but it also retains the existing “cancel only at inception/renewal” roadblocks associated with the minuscule window of time available to insureds to replace an NFIP policy during their lenders’ premium payment process.
The additional consumer adverse decision made by the NFIP involves what is known as “continuous coverage.” In basic terms, years ago, the NFIP created language in its Flood Manual which requires NFIP policyholders to remain loyal to the NFIP to maintain rates, which are represented by the NFIP as being subsidized rates. Policyholders who leave the NFIP for a private market option are penalized for doing so because they are denied their previous rate calculation if they choose to return to the NFIP.
There is no basis in the law for the NFIP Flood Manual to require taxpayer-backed NFIP coverage as opposed to simply flood insurance coverage, to qualify for subsidized rates at any time. There is no legal requirement that property owners, in the words of the NFIP, ‘remain loyal customers’ to the NFIP.
NFIP policyholders should be able to cancel their policies when it is convenient for them and have their money refunded to them for the unused portion of their policy. Further, consumers who choose to explore flood insurance outside the NFIP should not be punished for being disloyal to a federal monopoly that they fund through the payment of their own taxes.
These regressive policies are a throwback to the days when NFIP leadership foolishly viewed government-backed insurance products as the only option that should be available to consumers. Such penalties for insuring in the private market will torpedo the bold and universally lauded NFIP Moon Shot initiative being pursued by today’s more enlightened NFIP leadership to double U.S. flood insurance coverage.
Craig Poulton is chief executive officer of Salt Lake City-based Poulton Associates, LLC, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATcoverage.com. These opinions are his own.