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The Rough Notes Company Inc.



October 29
10:02 2018

ISO Emerging Issues Perspective


Wading through the treacherous waters of private and federal flood insurance programs

When it comes to covering flood damage, many insurers can correctly say it’s not their job. Some of those insurers may not have issued a flood policy in 50 years or longer—if ever. Why the disconnect? Outside of the National Flood Insurance Program (NFIP), little coverage has been available in the private market.

Although insurers understand the challenges of their business, prospective policyholders may not. It can be a far simpler calculation in a home owner’s mind: Property insurance exists to help rebuild when disaster strikes. A flood counts as a disaster. Therefore, when a flood occurs, it’s time for the insurer to pay a valid flood claim.

Making flood insurance available where it’s needed and inducing property owners to take the coverage can be a complicated balancing act.

When claim settlements lag—or worse, some home owners learn they don’t have the flood coverage they assumed they had—the finer points of NFIP coverage and policy exclusions are cold comfort. Policyholders also may wonder why their insurer paid for their flooded car under standard comprehensive auto coverage but not for their flooded house under a standard homeowners policy. The agent or broker and the insurer itself can become targets of the customer’s protest and disillusionment.

Reputations at risk

That dissatisfaction may be channeled through social media posts, news reports, litigation, or any combination thereof. It’s a huge reputational risk and may only worsen if the producer or insurer had any influence over the presence, scope, or absence of flood coverage on a home. Insurers that serve as go-betweens for the NFIP through the Write Your Own  program assume none of the underwriting risk, but they attach their names to claims processes that aren’t entirely their own.

Consider an article in The Star-Ledger, a New Jersey newspaper, that was published about four months after Superstorm Sandy ravaged properties along the state’s coastline. The headline reads: “Hurricane Sandy flood insurance claims: an exercise in exasperation, home owners say.” And yet the heart of the story comes down to this: “Interviews with nearly two dozen Shore home owners and local officials have revealed widespread frustration with the federally run program and breakdowns that have occurred at its private sector partners—insurers and flood adjusters—when it comes to delivering basic levels of customer service and coordination.”

The story focuses on a half-dozen New Jersey home owners, chronicling the struggles they’re said to have endured to settle their claims—from reaching an insurer or adjuster, to obtaining damage assessments, to actually depositing claim checks into their bank accounts. Along the way, the story says, some flood victims received a crash course in concepts such as actual cash value, others became familiar with the regulatory apparatus, and one discovered the clout of gaining a state legislator’s attention.

Are the criticisms fair? The private insurers involved may have reasonable explanations for the timing and amounts of claim payouts to home owners. Missteps may have resulted from factors beyond the insurers’ control. But when policyholders perceive the process as unfair or dysfunctional, the home owner’s insurer is the face of that process. The insurer’s name is at risk of being dragged across social or news media and possibly through the courts.

Breaking down complexity

Making flood insurance available where it’s needed and inducing property owners to take the coverage can be a complicated balancing act. It involves the Federal Emergency Management Agency (FEMA), which oversees the NFIP; private insurers, agents, and brokers who sell and service coverage; and mortgage lenders operating under federal banking regulations that require flood insurance in FEMA-designated Special Flood Hazard Areas.

A Write Your Own flood policy is an entirely different animal from a standard homeowners form, with its own scope of coverage, deductibles, limits, and exclusions. In the event of a claim, property owners may find themselves in a bureaucratic and legal quagmire among federal flood coverage, standard homeowners coverage, and any residual market coverage that may be in place, such as wind pools in hurricane-prone states. A complex and unfamiliar flood product can be confusing to the insured at the point of sale and holds the potential to become the source of a deeply unsatisfying customer experience when a loss occurs.

With so many moving parts, it’s no surprise the system can appear unwieldy to the end user, the policyholder. But the entire process can be simplified. Private insurers fled the residential flood market when it became nearly impossible to make the product financially viable. But what if there were a program to begin restoring a private flood insurance market, allowing insurers to write the coverage themselves and guide pricing with granular underwriting information and actuarially sound loss costs?

What coverage could be

What wouldn’t change is the exposure that helped to dry up the private flood market in the first place, leaving the NFIP as the default insurer for most of the at-risk residential properties in the United States. The scale of that risk may be the first barrier to persuading private insurers to return to the market. But the reality is that private insurers and producers—whatever their level of involvement in flood insurance—are already exposed.

The reputation of Write Your Own insurers may depend on how the NFIP process is functioning at any given time. Insurers that don’t issue flood policies can still face the disappointment of customers who mistakenly thought they were covered. And producers can be held liable for allegations that they provided customers inadequate or inaccurate advice on flood insurance.

Let’s explore the possibilities of a flood insurance program that’s fully under an insurer’s control and is modeled on standard homeowners coverage. It’s a compelling prospect for insurers to consider as the NFIP comes under increasing strain:

  • Risk selection and pricing are at an insurer’s discretion, subject to applicable regulations.
  • From point of sale to point of claim, the program can be integrated into an insurer’s workflows and customer service infrastructure.
  • Policyholders have one point of contact for claims.
  • Producers have a user-friendly product to offer customers, providing terms and conditions that track closely with the traditional homeowners form.

Insurers and producers can gain greater control over both the flood exposure and the customer experience and influence how their reputation can weather an actual storm.

The author

Marc Treacy is managing director of flood insurance for ISO, a Verisk (Nasdaq:VRSK) business.

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