Understanding Flood Options: Private vs. NFIP

After the devastating hurricanes of 2017 and the flooding that followed, flood insurance has once again been making headlines—and not necessarily the good kind.

The controversial NFIP is up for funding reauthorization this year, but many believe funding should not be approved without reform. Congress has delayed reauthorization several times, and discussions appear to be at a stalemate. The NFIP was even forced to stop writing and renewing policies when the government shut down at a budget impasse in January.

At its inception, the NFIP was not intended to be a long-term solution. Congress created it simply as a conduit for the creation of a stronger private flood insurance market. However, the plan fell apart in 1978 when the U.S. Department of Housing and Urban Development used its statutory authority to nationalize the flood insurance industry.

With this history in mind, what does an insurance professional need to know as they search for reliable flood insurance markets and better coverage for their clients? The increasing severity of flood losses is a reality that conscientious producers can’t ignore—which means agents and brokers need to keep a close eye on the flood options they make available to their clients.

Flood Insurance Options

The current flood insurance marketplace offers three major options for consumers:

1) An NFIP policy obtained directly through the NFIP or a WYO insurer. WYOs are private insurance companies that assume no risk, but sell NFIP-backed insurance under their companies’ names. Under the arrangement, the private companies are compensated for policies written and claims processed, while the government defines underwriting rules and assumes all of the risk.

Before selling these policies, agents and brokers are required by the NFIP—and, in some states, by insurance regulators—to take a class to learn the terms and rules associated with NFIP flood insurance.

NFIP coverage is limited to $250,000 on personal residences and $500,000 on commercial structures. The program is reliant on government funding, so if it is not reauthorized or the government debt ceiling is not adequate, the NFIP cannot issue new coverage or renew existing policies.

2) A privately backed insurer that sells an NFIP lookalike policy. Some insurers, including some WYOs, now offer policies which are nearly identical to NFIP policies, besides the fact that the issuing carrier assumes the risk. It is still unclear how many states will require insurance professionals to take the NFIP class to sell these products.

This approach is fairly new, and the jury is still out as to how state insurance commissioners will regulate it. The product is usually sold as surplus lines coverage. Adjusters may also need to be NFIP-certified in order to adjust claims under such policies.

3) A private insurer with a privately backed, “normalized” policy that comports to insurance industry norms. High-quality private insurers offer more robust coverage and higher limits than the NFIP or similar policies. Often, these private policies come with lower rates for policyholders, language that is easy to understand and explain to clients, and user-friendly applications and policy forms.

Further, options are sometimes available to bundle flood with other perils like earthquake and landslide. With some private insurers, agents and brokers will find a broader definition of “flood,” plus coverage that includes basement contents, business interruption and additional living expense, among numerous other enhancements.

Other Factors to Consider

Flood insurance commissions generally range from 10% to 20%. However, in terms of agent or broker income, it is also important to weigh the time and effort required to produce a flood policy, which has a reputation for length and complexity.

Agents should also consider that claims adjusted within NFIP norms must be adjusted by a limited pool of NFIP-certified adjusters. Typically, claims are paid more quickly when adjusted under a normalized private flood insurance policy.

If a private market insurer fails to get adjusters to its policyholders in an appropriate amount of time, or if their adjusters do not act in good faith when adjusting claims, state insurance commissioners can force proper and fair claims adjustment. The NFIP answers only to Congress or to the federal court system, severely limiting the remedial options available to claimants.

Offering normalized, reliable flood insurance options to policyholders is not only good for business, but can also help prevent errors & omissions claims. Winning the flood portion of an account is often the variable that wins the entire account.

Craig Poulton is CEO of Salt Lake City-based Poulton Associates, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program.