The current state of flood insurance

High risk places and properties

The NFIP was created in 1968. It has been amended several times for the following reasons:

• • • To identify properties at risk;
    • To establish communities that comply with floodplain management regulations, and;
    • To establish rates affordable enough for insureds to buy coverage.

Flood insurance is generally not available in the private market. Why? Because the private market could not price coverage affordably and have rates that were actuarially sound. This is part of the problem: Rates have been discounted to the extent that the program is seriously in debt.

Also, properties in flood prone areas have been repeatedly flooded and had claims paid. The program was changed so that such properties prone to repetitive claims are designated as such. Once a property is so designated, it can then be required to be relocated or demolished. It makes no sense for properties in areas known to be at high risk for flooding and that have already been repeatedly flooded to continue to be insured.

In order to receive flood insurance, communities must be recognized by FEMA. The community also must apply to join the program, and set up flood management standards to help avoid or mitigate future flooding.

Communities in such areas that choose not to participate in the program may find their access to grants, loans or guarantees by various federal agencies are no longer available or are severely restricted.

Carrier considerations

A "Write Your Own" program was established in 1983 to encourage private insurers to participate in the NFIP. In this program, carriers write the policies under their own names, collect premiums, keep a percentage for costs and commissions and invest the rest. The carrier then services the policies and pays claims. The government is responsible for any underwriting losses, so the carriers are not exposed to losses the way are they with their regular book of business.

There are, of course, strict eligibility requirements for properties in order to qualify for flood coverage:

• • • Properties must have two or more exterior rigid walls.
    • Properties must be roofed.
    • Fifty-one (51) percent of the property's actual cash value must be above ground level.

Contents also are eligible for coverage. Contents in buildings without rigid walls on all sides must be secured to prevent floating away from the property in the event of a flood.

Mobile homes must be on permanent foundations and not on slabs. If a mobile home is in a Special Flood Hazard Area (SFHA), it must be anchored by over-the-top or frame ties to ground anchors, or anchored according to manufacturer specifications, or in accordance with the community floodplain management requirements.

Analysis brought to you by the experts at FC&S Online, the unquestioned authority on insurance coverage interpretation and analysis for the P&C industry. To find out more, visit www.nationalunderwriter.com/FCS.

Two different pieces of federal legislation could impact the National Flood Insurance Plan. (Photo: iStock)

Proposed legislation

Sen. Bill Cassidy (R-La.) and Sen. Kirsten Gilibrand (D-N.Y.) have proposed draft legislation that would reauthorize the NFIP until 2027. Reauthorizing it for 10 years would avoid uncertainty in both the housing and insurance markets. Their bill is called the Flood Insurance Affordability & Sustainability Act of 2017. The act includes steps to:

• • • Improve financing;
    • Provide premium assistance;
    • Encourage private market access;
    • Improve mapping techniques and accuracy;
    • Increase NFIP contractor accountability;
    • Increase engineering accountability;
    • Ensure litigation costs are billed appropriately;
    • Simplify the claims appeal process, and;
    • Ensure that earth movement will not be used as an exclusion when such movement is caused by flood.

Another bill, the Flood Insurance Market Parity and Modernization Act (H.R. 1422/S. 563) introduced by Reps. Dennis Ross (R-FL) and Kathy Castor (D-Fla.) along with Sen. Dan Heller (R-Nev.) and Jon Tester (D-Mont.), clarifies private flood insurance regulations and provides a clear definition of private flood, which will hopefully prompt more insurers to enter the private flood market.

Additional private carriers in the market would provide consumers with more access and options to flood insurance. This additional coverage would help lessen the strain on taxpayers to fund NFIP.

These lawmakers also recommend reauthorizing FEMA and reinstating rules to allow policyholders to cancel their flood policies mid-term if they replace coverage with private flood policies. They would receive a pro-rated refund of any unused premium. Increased mitigation efforts are supported as floods are an ongoing issue.

Mishandled NFIP claims

Meanwhile Sen. John Kennedy (R-La.) is filing a bill that will give FEMA power to fire engineers and other consultants if they mishandle insurance claims under NFIP. This bill became necessary when it was realized that consultants who were criticized in the handling of Hurricane Sandy claims continued to handle later claims from different flooding in Louisiana.

Under this new bill, FEMA would be allowed to establish rules for removing consultants as well as an appeals process for consultants accused of wrongdoing. This detail is the result of an episode of "60 Minutes" that questioned the validity of engineering reports after Hurricane Sandy. Thousands of claims were reopened by FEMA after the segment aired.

It's also worth noting that in April, the Government Accounting Office (GAO) released a report encouraging comprehensive reform of NFIP in order to make it solvent. One of the biggest challenges is keeping coverage affordable while maintaining solvency — almost an impossible task as actuarially sound rates are very expensive in the most vulnerable areas.

The report recommends action in six areas:

• • • Outstanding debt;
    • Premium rates;
    • Affordability;
    • Consumer participation;
    • Flood resilience efforts, and;
    • Other barriers to private-sector involvement.

The report acknowledges that there are challenges inherent to these reforms. Among them: The proposals could increase costs for the government, private sector or property owners.

However, addressing the issues identified in the six areas presents the best opportunity to address the current issues with NFIP.

See also:

Trump presidency could bring momentum to much needed flood insurance reform

5 factors to minimize home-related risks