On March 23, 2018, President Trump signed the Omnibus Budget Bill, which extends the National Flood Insurance Program (NFIP) until July 31 and increases funding for flood mapping and mitigation of homes. While the House passed a longer-term reauthorization and reform bill last November, the Senate has yet to take the first step and mark-up its version of the legislation.
In the absence of Congressional action, NAR has been working with the National Flood Insurance Program (NFIP) to move forward with provisions of the House bill that do not require an act of Congress. While these may not be the major provisions, NFIP does have broad legal authority and discretion to make some meaningful program changes and address NAR member concerns. Here are the latest regulatory reforms announced by the NFIP.
- Encouraging a Private Market for Flood Insurance
NAR members are concerned that because the NFIP sets national average premium rates, the NFIP overcharges some property owners while undercharging others. While the Program has begun exploring a modernization of its actuarial rating methods (and contracted with Milliman Inc., which conducted NAR’s NFIP research), an overhaul could take years. The NFIP recognizes that in the interim, private flood insurance companies would be able to offer the same or better coverage at lower cost for many NFIP policyholders. For these reasons, NFIP recently proposed several program changes, including:
- NFIP Policy Refunds. Currently, NFIP does not allow cancellation of an NFIP policy if a policyholder switches to private flood insurance. This creates a disincentive because switching means buying two duplicate flood insurance policies (one from NFIP and the other from the private market). On March 27 however, the Program announced that policyholders will be able to cancel after October 1, and receive a pro-rata refund of their NFIP premium upon providing documentation of private coverage and lender approval. Read NFIP’s Bulletin.
- Non-Compete Clause. Currently, NFIP prohibits its insurance company contractors from selling competing private flood insurance policies. On March 16, the NFIP proposed to strike this clause from the contract. This is notable since one of the main sticking points to the House bill in the Senate is over private insurance companies “cherry picking” from the NFIP and these are the insurance companies with the most access to NFIP loss data and thus best positioned to “cherry pick” the best risks for private policies. Read the NFIP Federal Register Notice.
- Global Reinsurance. Reinsurance allows NFIP to transfer some of the financial risk from U.S. taxpayers to international reinsurance companies. Last year, the NFIP purchased $1 billion worth of coverage. As a result, NFIP was able to borrow $1 billion less from the Treasury to pay claims for Hurricane Harvey. This year, the NFIP decided to re-up and expand its purchase ($1.5 billion so far) with additional placements expected later this year. For a recent news report, click here.
- Modernizing Flood Maps and Insurance Rates
- Letters of Map Amendment. NAR members are concerned that after paying mapping fees and taxes, each homeowner must spend $500-$2,000 on an elevation certificate to obtain a map amendment that removes their property. States like North Carolina and Minnesota already collect much of this elevation data using Light Detection & Ranging (LiDAR) but for whole neighborhoods at once, rather than surveying each individual property, one by one. The NFIP recently updated its Risk Map Technical Standards to allow property owners to submit LiDAR data in lieu of an elevation certificate, which saves $500-$2000 per property. Here are the Risk Map Standards; #627 provides for map amendments based on quality-level-3 LiDAR.
- Write-Your-Own Commissions. The NFIP provides an expense allowance to its insurance company contractors, which represents roughly 30 percent of the cost of an NFIP policy. NFIP recently proposed to trim this allowance by 1 percent and pass through the savings to policyholders. Here is NFIP’s notice.
While these are modest administrative changes, they are steps in the right direction. NAR will keep working on the broader set of reforms in the 5-year reauthorization bill, but I did want to share the recent progress on the regulatory side.