NFIP stall hits agents hard, consumers harder

Borowski: Insurance producers must read and follow the instructions issued by FEMA regarding a lapse in the NFIP authorization and adhere to these guidelines. Producers need to communicate with their write-your-own (WYO) carriers and/or NFIP to assure that all business they have already processed will be completed and issued.

For all new applications, change endorsements or renewals that were in the middle of being processed when the lapse occurred, insurance producers must review these with their WYOs to determine what their actual status is at this time.

PIA also has been encouraging its members to send an update memo to all of their insurance customers, and to any group of prospects to whom the insurance producer may have issued a marketing piece on NFIP, to advise them of Congress's failure to extend the program and what it may mean to them. These messages should comply with your WYO and NFIP's instructions. Producers should be prepared to answer questions from their customers about the status of the flood insurance program.
It is critical that agencies immediately contact each of their WYO insurers and verify how that WYO wishes you to proceed on new policies, change endorsements and renewals, and anything already in the pipeline. For agencies with two or more WYO insurers, we are advising that the agency be sure to contact each of them, as there may be some differences.

Mitchell: The "hiatus," as FEMA refers to it, prevents insurers from writing new or renewal coverage or amending existing policies. Unfortunately for agents and brokers, they will often be the ones breaking that bad news to policyholders and explaining why coverage is unavailable. For those with existing policies, the hiatus should go largely unnoticed. Claims will still be paid by insurers, who will be reimbursed once the hiatus ends and the program is reauthorized.

(Read AA&B's feature story on supplementing flood insurance, "Excess flood insurance: Why NFIP isn't enough.")

AA&B: Is there a possibility that the Senate will not move to amend the issue this week? If so, what is the best advice agents can give their customers, especially on the threshold of spring flood season?

Prible: We believe it is likely that Congress will move to extend the program this week. Though many rightfully believe the flood insurance program needs to be reformed for future financial stability, the program overall has proven its value to consumers and has earned strong bipartisan support from Congress. Should the program not be extended, we urge consumers to contact their independent agent to explore options available in their area.

Becker: It's likely that the Senate will not vote on an extension until late this week. The attention this has gotten should prompt the Senate to act. Failure to pass this is unlikely; however, the short-term extension of the total package (COBRA, unemployment, etc) remains a tough sell.

(Read an AA&B feature by Mike Becker on the importance of NFIP reauthorization, "Legislative Roundup: Feds Must Reform NFIP.")

Mitchell: It's always possible that the Senate won't move on the issue, or that Sen. Bunning's opposition will continue to keep the bill from passing. However, this is fairly unlikely. Members of the Senate are very much aware of the impact of allowing the NFIP and other spending programs to expire, and 99 of them supported passage of the short-term extension. Even in this political landscape, it is likely that the logjam will end sooner rather than later. Agents can reassure current customers that their policies remain in effect.

AA&B: Are there alternative markets available to customers for this type of coverage?

Prible: Unfortunately, though there are limited and expensive alternative markets available in some isolated geographic areas, there is not a widespread alternative available to most consumers.

Borowski: Before the financial markets meltdown, there were. Since then, most of the underlying direct market for up to maximum NFIP limits is either gone, or not available in a lot of states or regions. However, agencies should inquire. Although the flood insurance market over excess of NFIP limits has had some availability, but its conditions may change because NFIP technically is no longer available.

Mitchell: The NFIP was created because there was not a private market for this coverage that is affordable to homeowners and businesses. Because NFIP rates were not actuarily sound but instead provided a significant subsidy for property owners, no alternative market developed that could be looked to now. Should the program be amended so that policyholders pay actuarily sound rates, it is possible that alternative markets might develop. The best advice for property owners in flood-prone areas who need new coverage or need to renew their policies is to wait the few days it will take the Congress to extend the NFIP program.

AA&B: Is the insurance industry working with legislators to amend the issue?

Prible: Yes, the insurance industry is working with legislators on an ongoing basis to ensure there is an extension of the program.

Becker: The industry is working to educate Congress on the consequences of failing to make this lapse in the flood insurance program a short one.

Mitchell: NAMIC has been working to educate members of Congress and others about the NFIP for years. We have had numerous meetings to explain how the program works, how it benefits homeowners and businesses, and what improvements or reforms can be made to ensure it remains intact and financially sound. Additionally, NAMIC works with the NFIP Coalition to provide feedback to FEMA, who administers the NFIP.

AA&B: Is the addition of wind coverage the main or only sticking point to NFIP reauthorization? What about the debt forgiveness for Katrina expenditures?

Prible: The addition of wind coverage is a major sticking point toward long-term reform and reauthorization of the program, and we believe that it should be set aside. The Senate voted on the addition of wind 2 years ago and resoundingly defeated its inclusion. The debt forgiveness for Katrina expenditures is less of a roadblock. Most in Congress agree with forgiving the debt, they just need to find a way procedurally to enact that provision over the restrictions of the House's PAYGO (pay-as-you-go) rules.

Borowski: Wind is not the only sticking point. Forgiving the debt is also a sore spot. Also, given the PAYGO rules, it's easier in the Senate to wipe the debt away.

The challenge with the NFIP at this time in Congress is that there a large number of members that have one or more issues with the current program. For some, it is getting wind in, or making sure wind remains out. For others, it is the request to forgive the debt. Some see structural and operational problems with it, with their perceptions governed by what they think was wrong in the federal response to Hurricane Katrina. Still others take a decidedly parochial view that federal funds of this magnitude should not be spent to help only part of the U.S., or they have staked out a "no more deficit spending" position and want to see reforms enacted first.

What Congress needs to remember is that failure to keep the flood insurance program authorized while reforms are considered risks the stability of the real estate market which, in turn, endangers the nation's economic recovery.

Mitchell: The inclusion of wind coverage in the NFIP is strongly opposed by the Obama Administration, despite attempts by the House of Representatives to include it into the program. While members of the House have voted to include the wind provision in the past, the Senate voted against this measure and it remains a point of contention when legislation to reform the NFIP is discussed. The NFIP reforms should not include the wind provision.

While few members of Congress are thrilled at the prospect of wiping out over $20 billion in debt, they increasingly have accepted that this is a 'necessary evil' to fix the program. It has been said many times – by lawmakers and by FEMA officials – that as it currently exists, the NFIP will never be able to repay the debt it incurred in 2005. Paying the interest alone would require one third of all the money that the NFIP takes in annually, which would cripple the program's ability to cover present claims.

(Read an AA&B feature on talking to your customers about flood zones, "Getting Personal: What's your flood zone?")

AA&B: What do you think is the long-term solution to the ongoing issue of funding the federal flood insurance program?

Prible: In this case, it is not the actual funding of the program that is causing this temporary lapse, but the program's authorization from Congress. Previously, Congress usually gave the program 5-year authorizations, in which the program only had to come up for reauthorization every five years. After Hurricane Katrina, however, many in Congress and the industry agreed that programs needed to be made to the program to put it on a firm financial foundation for the future. Unfortunately, there was disagreement over the exact reforms that needed to be enacted. There have since been short term extensions, sometimes of 1 year or 6 months, to give enough time to come to an agreement on the reforms. We believe it is imperative to put aside these short-term extensions and instead pass a long term, multi-year extension of the program to give Congress additional time to consider reforms.

Becker: A solution is to reduce exposures through mitigation and actuarial soundness. PIA supports reforms that would help ensure a successful future for the NFIP, its policyholders and those who write and service the policies. We support the WYO program, which has proven to be an effective means of distributing flood insurance. Although improvements can always be made to increase efficiency, PIA is skeptical that a centralized service entity approach is the answer.

The NFIP is currently in considerable debt due to the significant claims from Hurricanes Katrina, Rita and Wilma. Four major hurricanes striking the U.S. in 2 years caused extensive flooding losses that exceeded reasonable reserving; and just several years prior to these events, Congress moved monies from NFIP premium reserves (which at the time were described as excessive) to offset FEMA operating expenses and redirect the savings to other federal government programs.

PIA wholeheartedly supported Congress's past increase of the program's borrowing authority to $20.775 billion, as it was absolutely essential to ensure that policyholders received payment on their flood insurance claims.

FEMA is now responsible for repaying the $18.75 billion loan from the Department of Treasury. Interest payments alone on this loan totaled $298 million in fiscal year 2009. FEMA receives approximately $3.2 billion each year in flood insurance premiums and fees, thus leaving slightly more than half to keep on hand to cover any future policy claims and to continue administering the program. PIA feels it is necessary to forgive the debt of the NFIP to ensure that the program can build reserves for future flooding events.

Mitchell: The long-term solution is a long-term extension of the program, coupled with common sense reforms and debt forgiveness of the $20 billion the program currently owes the Department of Treasury. This would ensure that we don't find ourselves where we are now — in a situation where one senator, or one caucus in the House, can cause another "hiatus." The NFIP is badly in need of reforms to make the program more financially robust and ensure the long-term viability of the program.

The phase-in of actuarial rates for non-residential properties and non-primary residences would be a good step in this direction, allowing the program to charge actuarially sound rates for the coverage provided.

Updating of flood maps and enforcing coverage requirements would help to alleviate unnecessary losses for homeowners. Hurricanes Katrina and Rita exposed a lot of weaknesses to our current system. Out of date flood maps and poor enforcement of the requirement to purchase coverage led to thousands of homeowners suffering significant losses that would have been covered if only they had adequate flood coverage.

Additionally, the 2005 hurricane season exposed the financial weakness of the system by allowing subsidies for coverage, without regard for whether the property involved was a primary residence, a vacation home or an investment property.