Public Policy Analysis & Opinion
By Kevin P. Hennosy
IF THE CRICK DON’T RISE …
The U.S. private flood insurance subsector enjoys growth
This year, the National Council of Insurance Legislators (NCOIL) will work on a draft model law for the purpose of fostering private flood insurance at the state level. The NCOIL effort endeavors to meet the need of large insurers to shape their participation in the private flood insurance market based on national norms. Recent market growth is vigorous, but some carriers remain leery of entering the private flood insurance market when regulatory compliance assumptions reflect the actions of only a few states.
Any responsible consideration of private flood insurance must begin with history. The federal flood insurance program came about only after the failure of private insurers to provide flood coverage. Historically, carriers refused to provide flood insurance as part of residential coverage. Neither would carriers offer free-standing policies.
Congressional calls for a public flood insurance program increased after widespread flooding in New England in the 1950s. Senators Prescott Bush (R-Conn.) and John F. Kennedy (D-Mass.) worked across the aisle to propose a federal role in providing flood insurance.
The NCOIL proposal appears to be aimed at providing at least a pretense of state regulation over private flood insurance policies.
A series of flood events in the 1960s increased political pressure in the Capitol for a federal flood insurance program. In 1962, an “Ash Wednesday storm” battered the eastern seaboard. In 1964, the Easter earthquake centered in Prince William Sound pushed tsunami waters on shore from Alaska down the Pacific Coast. Hurricane Betsy pummeled Florida and Louisiana, including the New Orleans-centered district of Representative Hale Boggs (D-La.).
As Democratic Majority Whip during most of the 1960s, Boggs wielded the legislative power to secure passage of the National Flood Insurance Act in 1968. Shortly before his death in 1972, Boggs worked with the Nixon Administration to amend and strengthen incentives for communities to participate in the National Flood Insurance Program (NFIP).
In 1983, Congress and the Reagan Administration launched the Write Your Own insurance program, or WYO. The program empowers private insurers to market, write, and service flood coverage based on the NFIP standard flood insurance policy.
Insurers gain several advantages from participating in the WYO Program. Participants receive an expense allowance for policies written and claims paid. In addition, because the program allows them to print the policies “on their own paper,” companies may benefit from customers looking for “one-stop shopping.”
Appearances aside, WYO Program policies must comply with NFIP rules. In addition, the risk transferred through the policies moves to the NFIP pool via a reinsurance mechanism.
The NFIP recognized several policy aims through the WYO Program.
First, the outreach of numerous private insurers attracts policy sales that categorically diversify and geographically spread the risk of financial loss added to the NFIP risk pool.
Second, the NFIP welcomes the ability to “piggyback” on the private sector’s distribution network and claims payment facilities.
Third, the NFIP believes there is a public benefit to private insurers gaining operating experience concerning flood underwriting and losses, within a federal framework.
2011 GAO report
As late as March 2011, in congressional testimony responding to a Government Accountability Office (GAO) report, insurance trade associations indicated that a private flood insurance market simply did not exist.
The GAO recommended encouraging private insurers to assume more flood risk, which at the time resided solely with taxpayers. The report noted that it was not the first time that GAO made the recommendation. Insurance carriers had opposed previous proposals for a private flood insurance market. The report explained:
In 2007, we evaluated the trade-offs of having mandatory all-perils policies that would include flood risks. For example, it would alleviate uncertainty about the types of natural events homeowners insurance covered, such as those that emerged following Hurricane Katrina. However, at the time the industry was generally opposed to an all-perils policy because of the large potential losses a mandatory policy would entail.
In late spring of 2011, this column reported on the hearing. “The Independent Insurance Agents and Brokers of America (IIABA) testified that the NFIP is ‘virtually the only way for people to protect against the loss of their home or business due to flood damage.’”
A spokesperson for the Reinsurance Association of America (RAA) could almost be heard running down the hall away from the hearing room. As this column noted in 2011, “The reinsurers’ association told the hearing that there was no private insurance market available to accept flood risk; however, the federal government could better manage the finances of the program by purchasing private reinsurance and issuing catastrophe bonds.”
Shortly after the GAO report was issued, a few large insurers and a Lloyd’s of London syndicate entered the American market with private flood insurance products. According to National Association of Insurance Commissioners (NAIC) data, the number of carriers offering private flood insurance has continued to grow—from 49 companies in 2016 to 124 in 2018.
Carriers succeeded in persuading state and federal officials to allow them to base product pricing on catastrophe modeling rather than historical data.
Also, private flood insurers received a proverbial shot in the arm in early 2019 from the Federal Deposit Insurance Corporation (FDIC). Until that time, mortgage lenders shied away from accepting private flood insurance as a required guarantee tendered with federally backed loans. Last year the FDIC issued guidance in favor of accepting private flood insurance.
The NCOIL proposal seeks to provide a state-based framework for flood policies designed, priced, underwritten, and serviced by private insurers. At last count, 34 jurisdictions allow sales of private flood insurance policies. The policies often compete on price with the federal products, without having to comply with the federal rules that govern coverage. Some customers welcome the absence of federal rules, such as those established to dissuade construction in areas of the greatest flood risk.
The NFIP caps the insured value of a residence at $250,000. Program rules cap payments for “furs, jewelry, fine art or collectibles” at $2,500. Private insurers do not operate under these constraints, even if such underwriting is foolhardy.
The NCOIL proposal appears to be aimed at providing at least a pretense of state regulation over private flood insurance policies. The following description of the NCOIL approach reflects a discussion draft of the model act as circulated in January 2020. Readers should find the most up-to-date draft at www.ncoil.org
Insurers. The NCOIL model law begins with a restraint on state action. The model law prohibits the prior approval of rates for private flood insurance products. Insurers must just agree to use actuarial standards in setting their rates.
The model law says that states “may” audit rates; then again, states “may” not. In addition, states “may” review forms, but a statute based on the NCOIL recommendations does not require such a review.
Furthermore, the statute does not require private flood insurers to participate in the state Property and Casualty Guaranty Fund System, which lenders may find troubling.
Producers. This section of the model law seems skeletal and worthy of further constructive deliberation.
The NCOIL model law designates recordkeeping by producers as a “best practice” but does not establish a statutory requirement for general recordkeeping.
The most definitive requirement for producers contained in the proposed model law directs producers to notify prospects for NFIP/WYO purchases of the existence of private insurance alternatives. The model law requires the producer to secure and save a form on which the prospect acknowledges receipt of the information—the only defined recordkeeping requirement.
The December 2019 draft model law did not contain a reciprocal requirement for producers to notify prospects of the availability of NFIP or WYO Program products.
As noted, in 2011, IIABA expressed skepticism about private flood insurance. Since that time, its concerns have faded into history. At the NCOIL meeting in December 2019, Wes Bissett, senior counsel for government affairs for IIABA, expressed the association’s strong support for private flood insurance alternatives.
The NCOIL meeting minutes record Bissett’s observations: “IIABA has been very supportive of legislative efforts in Congress and individual states to address private flood-related issues that have arisen with the emergence of this market.”
The minutes also record that Bissett addressed the section of the model law that deals with producers and expressed the need for improvement. Bissett shared with NCOIL his concern about several technical and day-to-day impracticalities arising from the “private flood insurance alternative notification requirement.”
In addition, the minutes state that Bissett raised the issue of how the NCOIL model law would address federal subsidies available to NFIP and private flood insureds and across state jurisdictions.
The minutes also record Bissett’s comments on cancellation and nonrenewal rules: “This is going to be particularly important for someone who might have a private flood policy cancelled and they need to then get back into the NFIP. The reason this is important is because in order to get NFIP coverage there is a 30-day waiting period from the time of purchase. So if you are in a state that only requires cancellation notices to be provided 30 days in advance of a cancellation, a person in that situation of losing a private flood policy and needs to get back into the NFIP will have a gap in coverage.”
Finally, the minutes record Bissett’s comments regarding surplus lines: “IIABA suggests considering whether to eliminate the so-called diligent search requirement in connection with private flood placements on either a permanent or temporary basis.”
Observers expect a new draft of the proposed model act to be presented at the NCOIL meeting in March. The deliberations remain on a fast track. It does not appear that private flood insurance will reach its high-water mark for some time to come, but let’s hope the fast track does not take the sector “Waist Deep in the Big Muddy.”
Kevin P. Hennosy is an insurance writer who has written extensively on the history of insurance regulation.