Much has been written about the Federal Emergency Management Agency's $23 billion budget deficit and the federal government's attempts to right the Flood insurance ship through the Biggert-Waters Flood Insurance Reform Act and the Homeowner Flood Insurance Affordability Act.
One of the goals of the legislation is for the National Flood Insurance Program (NFIP) to receive a rate commensurate with a property's flood risk. In April 2015, FEMA began instituting surcharges, and in 2016, Write Your Own companies must implement additional rate increases, some in excess of 20% and begin the effort of re-underwriting NFIP policies.
These recent regulatory pricing points have helped fuel industry interest in the emerging private Flood insurance market. Over the past year, several companies have begun offering alternatives to the traditional Flood insurance program that agents are beginning to investigate.
While many Americans tend to buy insurance based on price alone, and it's true some of the new private primary flood products may offer a more attractive rate than the NFIP, it's important for insurance agents and consumers to be aware of several additional factors that may impact the purchase decision when exploring this new marketplace.
Questions to consider
The bottom line from the consumer standpoint should be: Will the insurance carrier respond when I need them?
"After flood waters come rushing through a property owner's dining room, the homeowner is caught in a tough situation," said Keith Brown, CEO of Kalispell, Mont.-based Aon National Flood Services. "The companies that respond to claims quickly and efficiently are the ones that will succeed over time."
When conducting due diligence and before recommending a private flood insurance alternative, an agent should ask these three questions:
Harold Ancrum, a church member at Canaan United Methodist Church, checks on the floodwaters at the church near Summerville, S.C., Oct. 8, 2015. The church had some caskets come out of the ground at their cemetery beside the church during the flooding this week. (Photo: Mic Smith/AP Photo)
What is the carrier's financial strength?
The federal government entered the Flood insurance business because claims from a catastrophic weather event could potentially bankrupt many domestic insurance companies. Why should agents or consumers put their trust in the private Flood insurance market? Will private insurers be able to offer long-term service or will they be withdrawing from the market five years from now?
One of the features of the new private Flood insurance programs is the reliance on several capital markets. With several capital markets, if one discontinues participation because of a change in risk appetite, a program administrator can plug in a replacement and spread policies over the insurers that remain.
Many private Flood insurance programs use surplus lines insurance companies to underwrite the risk, but not all insurance companies are created equal. Successful programs rely on proven, reputable domestic and overseas markets that deliver exemplary service through major events.
"These markets are built to handle catastrophic risk," Aon's Brown said. "Agents will write wind-only coverage in the South Beach of Miami through Lloyd's. These types of carriers write Homeowners' insurance in Tornado Alley, Taiwan and Australia."
Surplus lines carriers evaluate flood risk from a global perspective. When a hurricane occurs, the underwriters may incur a loss, but there's never been a storm that's touched the entire planet at once. For example, syndicates operating within Lloyd's of London can spread their risk around the world, a capability that many domestic insurers cannot accomplish directly.
These companies have been writing flood risks in the U.S. and other countries for decades and offering insurance much longer than the federal government. That experience has made them more knowledgeable about the risk and more familiar with how to price flood risks.
Frazer Eades, right, Jay Ashby, left, and Scott Youngblood prepare the furniture store Augustus & Carolina with plastic and sandbags before high tide hit historic downtown Georgetown, S.C., Oct. 8, 2015. (Photo: Mic Smith/AP Photo)
How does the coverage compare to the NFIP?
Compare the private Flood policy coverage against FEMA's offering. Begin with how the policy defines flood. Different private policies may have different definitions.
FEMA established the benchmark. If the private policy is markedly different from the NFIP, ensure it is at least as expansive. As an agent, you don't want your customer to choose a policy based on a cheaper premium, only to find out after a claim there was no coverage because of policy limitations.
Because some companies have modified the Flood contract wording, some lenders may not accept certain private Flood products. An important question agents must ask is: Will lenders accept this policy? If not, keep searching, as there are private Flood policies that use the NFIP's flood definition, making them lender-acceptable.
Many private programs offer customers the advantage of coverage limits above NFIP's $250,000 residential and $500,000 commercial building limitations. Some private programs have developed new "bolt on" products that can be written in conjunction with the primary Flood policy to add coverage for items such as finished basements and additional living expenses.
Bryan Allen works to remove wet drywall from a friend's flood-damaged home Oct. 8, 2015 in Columbia, S.C. (Photo: John Bazemore/AP Photo)
What agent services do they provide?
When considering private opportunities, agents should seek programs which offer streamlined, intuitive applications, underwriting and policy materials. This is one area in which private Flood programs already excel.
While FEMA intends to expand the NFIP application with additional questions, many in the private market have simplified the entire underwriting, quoting and application process. Some have even eliminated the need for elevation certificates and photographs.
Use of the private market provides an agent the ability to fully evaluate their clients' Flood needs. If a client owns a $1 million home with a theater in a basement, instead of writing the minimum required by the mortgage company, agents now have options to help a client fully protect assets.
These are exciting times for agents involved in the Flood insurance industry. While several new private enterprises have thrown their hats into the ring, by no means are they finished with their product development efforts. Both FEMA and private markets are striving to create responsible solutions to individual flood needs. This is just the beginning.
John Dickson is president and CEO of Advanced Insurance Coverages Inc., a subsidiary of Kalispell, Mont.-based Aon National Flood Services, a processor serving insurance companies participating in the NFIP. He can be reached at john.dickson@nationalfloodservices.com.
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