After Quiet April, NFIP Faces an Uncertain Future

FEMA sustained a $4-billion loss last year—making 2016 one of the most expensive years in the program’s history.

After borrowing another $1.6 billion from the U.S. Treasury Department to supplement this blow, the NFIP faces expiration in September, in addition to ongoing ripples from the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA).

The past two Aprils brought substantial changes for flood insurance consumers, agents and carriers, including new policy surcharges, rating procedures and requirements around clear communication of risk, not to mention the usual premium increases.

“Obviously the $250 surcharge has not been a big hit with a lot of policyholders,” says Cynthia DiVincenti, vice president of government programs, Aon National Flood Services. “Retention has dipped. It’s definitely been a challenge.”

As the NFIP heads for reauthorization later this year, the pressure will continue to build, particularly for agents who feel the burden of educating their clients about market uncertainty. Here’s what you need to know about flood insurance heading into 2017.

What’s On Deck?

Bruce Bender, specialist in outreach and risk communication services and national consultant for FEMA’s Risk MAP effort and recent FloodSmart marketing campaign, says this April brings “good news” for flood insurance agents and policyholders.

Although Congress mandates 25% annual increases for certain pre-FIRM properties, most are capped at 15%—and this year, FEMA is “pulling back how aggressive they are with the rating,” Bender says. “Some of the rate increases are going to be as little as 0-1%, and the average rate increase is only going to be about 6%.”

“Obviously we are facing rate increases again, but they’re not as bad as last year,” DiVincenti agrees. “You do have those pockets of risk—pre-FIRM non-primary residences and non-residential businesses continue to get hit with pretty sizeable increases each year. But the good news is there’s no increase on any of the fees, assessments or surcharges.”

What about Section 28 of HFIAA, which began requiring FEMA to clearly communicate flood risk to every NFIP policyholder as of April 1, 2016 for new policies and Oct. 1, 2016 for renewals?

In January, FEMA entered the second phase of Section 28, which involves “actually sending notices to the individual policyholders,” DiVincenti explains. “On their website, they put out various letters they have developed and will be using to contact policyholders to walk them through that clear communication—this is how the map says your property is located, this is how your policy is rated, this is what you can do.”

As the letters start rolling out, “agents will have to be a little more engaged, because now their customer’s going to have information in their hands that they may not have had before,” DiVincenti cautions.

Reauthorization Predictions

Overall, April will be a welcome calm before the storm. “We’re all hoping for a long-term speedy reauthorization without any lapses,” says Keith Brown, chairman of Aon National Flood Services. “A lot of the industry stakeholders are hoping for more of a 10-year reauthorization, whereas it’s been typically a five-year authorization.”

“The highest priority is a timely and long-term reauthorization,” agrees Cassie Masone, vice president of flood operations at Selective Insurance Company of America. “Any lapse would create confusion and potentially bigger issues, especially if there is a flooding event.”

Bender anticipates a fix for the continuous coverage issue: “If you have a policy with a subsidized rate in a high-risk area, and then you go to the private market, that is viewed as a lapse in coverage,” he explains. “Therefore, if you decide to come back to the NFIP a couple years later, or the private flood carrier you have pulls out of the market, you have to go with the nonsubsidized, full-risk rates, which for some could be quite high.”

The U.S. House of Representatives recently passed H.R. 1422, the “Flood Insurance Market Parity and Modernization Act of 2017,” which would clarify that a “lapse in coverage” means “not having any flood coverage at all,” Bender says. “If you switched to a private flood carrier’s policy, that would still count as continuous coverage.”

Masone expects reform efforts to focus on customer experience, such as improving FEMA’s appeal process and streamlining claim submissions. “But I think you’re also going to see some discussions more around rating, specifically focused on subsidized policies,” she predicts. Facing pressure to grow the private market, “FEMA will have to review and consider a more risk-based rating structure, which is very different from what we currently have.”

The issue of affordability isn’t going away any time soon. “But at the same time, we see comments from Congress about how this is a horrible, broke program—they lose sight that without the program, the taxpayer will be paying even more money,” Bender points out. “There will be continued pressure for them to figure out how they might want to fix the program. And as you and I have seen, sometimes their fixes aren’t the right fixes, and they have to go back and fix their own fixes.”

“The last thing we want is what happened with the Biggert-Waters reversal with HFIAA in 2014,” DiVincenti adds. “We need to work with the Hill and make them understand when they have reform ideas what those really mean to the ultimate customer experience, to ensure we’re not having that huge disruption.”

Jacquelyn Connelly is IA senior editor.