If you’re an insurance agent, “April” means “flood.”
What are the biggest changes affecting your flood insurance clients this year? Here are the top four you need to communicate to clients as they begin taking effect this month.
1) Premium increases. Beginning April 1, all pre-FIRM subsidize-rated businesses in high-risk areas—which FEMA and insurance agents helped classify as non-residential business properties over the last six months—will face a 25% premium increase. That’s in addition to the $250 surcharge implemented last spring.
“It could be a pretty significant rate increase for business properties,” says Keith Brown, president & CEO of Aon National Flood Services.
Meanwhile, FEMA has slowed rate increases for pre-FIRM primary residences, which Congress capped at 15-18%. According to Bruce Bender, specialist in outreach and risk communication services and a national consultant for FEMA’s FloodSmart marketing campaign and Risk MAP effort, premiums for those subsidize-rated policies will only increase about 5% this year.
Across the board, “the average premium’s only going up about 9%,” Bender says. “They pulled back in some areas and other areas they didn’t.”
2) Clear communication of risk. Section 28 of HFIAA requires FEMA to clearly communicate flood risk to every NFIP policyholder, beginning April 1 for new policies and Oct. 1 for renewals.
“Rollout of Section 28 is aimed at communicating the full flood risk determination to individual property owners, regardless of whether the homeowners’ premium rates are full actuarial rates,” explains Cassie Masone, vice president, flood operations at Selective Insurance Company of America. “This information will improve transparency in the NFIP’s rating structure and assist policyholders in understanding the costs of the coverage.”
In order to accomplish that, “FEMA wants to make sure that the policyholder knows how it’s rated now, and if the risk is different than how it is rated, what is that risk?” Bender says.
“This basically involves making sure the policyholder understands what the policy is rated under and what the actual risk is for the property,” Brown explains. “So agents will be getting quite a bit of communication outside the typical correspondence. When an insured gets that, it’ll probably be a point where they’ll call the agent and say, ‘Hey, what does this mean to me?’”
But because the process will require FEMA to ask questions like what zone a property should actually be in if it’s grandfathered, Section 28 potentially creates a whole lot of extra work beyond just fielding extra inquiries from prospects and clients. “FEMA will be asking the agents and WYOs to basically re-underwrite the policies at least 180 days prior to renewal,” Bender explains. “This includes verifying current flood map information as well as map information used if it is grandfathered or Newly Mapped procedure-rated.”
The workload could be intense: “If you think about it, an insured who’s had a policy for several years could have had it, for example, with three different agents and three different companies,” Bender points out. “They may not have that historic data easy to pull, so somebody’s going to have to research that.”
And FEMA has no plans to pay agents extra money to complete this re-underwriting, Bender adds. “So for the same amount of commission, the agents are doing a lot more work,” he says. “In addition, they don’t get commission on all the new additional fees. So the amount of commission an agent and company are getting from the total premium paid, compared to the amount of work, is decreasing—in some cases significantly.”
3) Newly Mapped rating procedure. Beginning in January 2017, a new rating methodology will apply to properties that have been newly mapped into a high-risk Special Flood Hazard Area (SFHA). “This is a low-cost option to help reduce the financial impact of map changes,” Bender explains.
For policyholders mapped into an SFHA, the newly mapped rating procedure “is kind of like a stepped program where it starts as a preferred risk rate, but then each year they apply a multiplier to it,” says Cynthia DiVincenti, vice president, government affairs and business quality at Aon National Flood Services. “It moves them toward that full-risk rate for the SFHA, but in measured, stepped process that eases them into it as opposed to ‘Here it is, pay it now.’”
But with the procedure comes a new challenge: Associated rate changes will occur every January instead of April. “Agents have to understand which of their insureds are being affected by rate changes based on when they were newly mapped in vs. other rate changes,” Bender says. “So it just got a little more complicated.”
4) Full-risk rates for lapsed policies. This year also marks an “elimination of subsidies for pre-FIRM policies where they specifically lapse and are reinstated,” Brown explains. “If a policy lapses, the insured is not going to be able to come back and maintain their subsidies that they had when they get reinstated.”
Bender notes two exceptions: if you had a loan and the lender no longer requires it, or if the community was suspended and you couldn’t get coverage. But in general, if you have clients with a pre-FIRM subsidize-rated policy or a Newly Mapped procedure rated policy and “either of those policies lapse more than 90 days, you will have to pay the full-risk rate,” Bender explains.
And in “an interesting twist,” Bender says the penalty applies retroactively to policy lapses. For example, consider a policyholder in Florida who cancelled their NFIP policy and went to the private market for cheaper coverage after Biggert-Waters passed in 2012. “You just created a lapse,” Bender says. “If that private program goes away or they stop writing or won’t allow renewals, and you try to come back to the NFIP, you will not get the pre-FIRM subsidized rates. You will have to pay full risk.”
Currently, a bill is circulating in the U.S. House of Representatives that could change that: H.R. 2901, the “Flood Insurance Market Parity and Modernization Act,” by Reps. Dennis Ross (R-Florida) and Patrick Murphy (D-Florida). The bill clarifies that a private flood insurance policy can satisfy the mandatory purchase requirement for flood insurance under the NFIP terms and that policyholders can move seamlessly between the private market and the NFIP without losing their subsidized or grandfathered rate simply for obtaining a private flood insurance policy.
But for now, “agents should make sure to work their renewals,” Bender says. “If they don’t, they may open themselves up to an E&O exposure because their clients will have to pay a higher premium, which in some cases could be quite expensive.”
As the NFIP heads for reauthorization in 2017, what’s next for flood insurance? Keep an eye on IAmagazine.com and upcoming editions of the Markets Pulse e-newsletter to find out.
Jacquelyn Connelly is IA senior editor.