The Future of Flood Insurance

Leaders in the insurance industry anticipated that 2019, much like 2018, would be a tumultuous year for flood insurance with large catastrophic events, a legislative impasse, and administrative uncertainty. For the National Flood Insurance Program (NFIP) and private flood insurance, all were true, and this may continue into 2020.

Unlike other insurance programs, the NFIP is authorized by Congress. And while private flood insurance is not controlled by a federal body, Congress’ actions (or inactions) influence the industry.

Recently, the NFIP has been suffering from a lack of a long-term reauthorization by Congress. The program, which saw its major authorizations expire two years ago, has been propped up by short-term extensions, with proposed reform measures receiving mixed reactions from stakeholders. To add to the uncertainty, FEMA’s new rating system, Risk Rating 2.0, has been postponed into 2021 after immense pressure by Congress to halt it. Uncertainty in the marketplace for flood insurance remains, as participation is low and losses mount with climate-related events.

So what’s ahead in 2020? For starters, it’s important to review some history.

An NFIP Timeline

Congress created the NFIP through the National Flood Insurance Act of 1968, after major flooding events caused vast uninsured losses. It requires periodic reauthorizations by Congress; the most recent long-term reauthorization was the Biggert-Waters Act of 2012 (BW-12). BW-12, among other things, asked FEMA to increase the program’s artificially low rates by 25 percent per year; establish higher penalties for lenders that do not enforce mandatory flood-insurance purchase; and define what “private flood insurance” is. BW-12 also extended the NFIP for five years, providing certainty to the program. According to the act, when the program’s authority expires, no new NFIP policies can be issued and existing policies cannot be renewed.

BW-12 expired on Sept. 30, 2017. At the beginning of 2017, the U.S. House of Representatives, with a Republican majority, proposed multiple reforms that, in short, attempted to move NFIP risk and authority to the private markets. The proposed legislation passed through House Financial Services, but after the summer recess—and Hurricane Harvey—Congress focused on disaster appropriations, and passed multiple short-term extensions for the NFIP.

When the Democrats took hold of the House in 2019, priorities changed. Congresswoman Maxine Waters (D-Calif.), the architect of BW-12, once again became the Chair of House Financial Services. Her focus was on affordability, mapping, claims reforms, and the availability of information on loss data.

In May, the House Financial Services Committee unanimously passed a flood reform and reauthorization bill. Key pieces of reform included a five-year reauthorization of the NFIP, increased mitigation funding, and access to claims information for NFIP and private flood policies. Additionally, the House bill included language allowing those who leave the NFIP for a private policy to return to the NFIP with no penalty, such as the loss of grandfathering.

However, in July, the Senate released the NFIPre bill. The NFIPre bill is similar to the House bill, but includes controversial measures that have been longstanding issues of contention among members of the House, such as capping Write Your Own (WYO) compensation. It also does not contain private flood insurance legislation.

A version of the NFIPre was introduced in the House, but, with two conflicting bills, there has not been a full vote in the House or Senate on either piece of legislation. With a succession of short-term extensions, there appears to be a stalemate with no clear path forward, and no expected long-term reauthorization until after the 2020 election. This means more short-term extensions, with possible short expirations as Congress remains indecisive on the NFIP’s future.

Risk Rating 2.0

As we near 2020, politicians and stakeholders have turned their attention to Risk Rating 2.0, which is a redesign on how FEMA will rate structures. As mentioned, FEMA recently created Risk Rating 2.0, which was intended to be implemented in October 2020. On Nov. 1, 2019, a letter was sent by a coalition of legislators asking FEMA to consider the consequences of perceived rate increases associated with Risk Rating 2.0’s implementation. On Nov. 7, 2019, FEMA announced it would postpone Risk Rating 2.0.

The concern is that Risk Rating 2.0 will cause some of the same disruptions in the real-estate market that BW-12 did when rates in some regions were raised. What Risk Rating 2.0 will actually do is, with new technology, communicate true risk. Rates will be modeled in advance, preventing the severe rating consequences seen in the wake of BW-12. Questions remain about how Risk Rating 2.0 will affect premiums, and also discounts such as grandfathering. The rating structure is not finalized, but FEMA must stay within the current legislative framework for the flood program, which caps increases and provides other safeguards.

With Risk Rating 2.0’s postponement, the question is whether the new rating structure will ever be fully implemented. There will be more to come on Risk Rating 2.0 in 2020, as speculation will grow and more information should be released on how the new rating scheme could look.

Lending Requirements

In January 2019, lending regulators issued their final rule on how to accept a private flood policy, and on July 1, 2019, the rule became effective. Even with the new rule, though, not all of the industry’s questions have been answered.

The final rule breaks the acceptance of private flood insurance into essentially two types of policies: those that lenders must accept if the policy meets the definition of private flood insurance found in the Biggert-Waters Act (mandatory acceptance); and policies lenders can consider, but do not have to accept if the private flood policy does not meet the definition of private flood insurance (discretionary acceptance).

In 2020, the new rule will require clarifications in some areas. Some lenders have said that they will accept no discretionary flood policies, and some private carriers have attempted to provide compliance aids. A memo from the government-sponsored enterprises (GSEs) states that lenders cannot rely on compliance statements alone, and 2020 will be a critical year for consensus to be formed around the new rule.

Private Flood Insurance

The private market is also undergoing changes. As mentioned earlier, legislation that allows the continuation of grandfathering for policyholders after they leave the NFIP and then return—along with the elimination of other existing penalties—has not been passed. Legislation has also been proposed to reinstate policyholders’ ability to move from the NFIP to a private flood policy mid-term, a practice FEMA rescinded in early 2019.

There is debate, though, regarding whether either provision will substantially increase private-market participation. And no action has been taken on either provision. When it comes to private flood insurance, many see a difficult marketplace, with decreased capacity and increases in some rates.

2019 has determined the direction of the flood marketplace for 2020. With congressional inaction, postponement of new NFIP rating programs, and a new frontier in private flood, uncertainty continues. Flood is America’s most common peril, and insuring against it has never been easy. Going in to 2020, insuring against flood will still be one of America’s greatest challenges, with no singular easy solution.