One of the best ways to envision the importance of something is to think of our lives without it. Imagine life, for example, without our electronics that help us easily communicate. Similarly, to understand the importance of flood insurance, imagine our nation without it. We would have no strong financial recovery tool, no means or organized plan on how to rebuild after a flood, and many communities over time would be left in ruin.
In turn, for flood insurance to become a tool for our communities’ financial recovery, individuals need to purchase it. For decades, one of the only options to buy flood insurance was through the National Flood Insurance Program (NFIP). But with the help of legislative and regulatory change, there are emerging options through private flood insurance that give us new opportunities to close the coverage gap by offering flood insurance to more homes and businesses.
With the growing private flood market comes a new gap for us to close: the lack of communication between the rules and regulations of the NFIP and the private flood market. The NFIP can offer beneficial rating to consumers, but when an insured leaves the NFIP there can be a loss of those benefits, sometimes referred to as “penalties,” as well as coverage issues and consumer confusion, and it is left up to the agent to bridge the communication gap between the two marketplaces.
Private flood offers more comprehensive products at competitive prices. Yet, insureds may want to return to the NFIP, which remains an insurer for almost any structure, and agents should make it their best practice to assume that the insured may have to come back to the NFIP in the future. The reasons for a return to the NFIP vary, from too many losses to having a structure that may not be deemed insurable in the private marketplace.
Unlike other lines of insurance, flood insurance has benefited from the NFIP’s federal standard for over 50 years. In that time, the NFIP has experienced catastrophic storms that resulted in best practices, as well as developed flood mapping, building standards and insurance incentives. Those insurance incentives give beneficial rating, such as grandfathering and cross-subsidies for structures that would otherwise see astronomical premiums.
In some cases, these incentives give insureds access to flood insurance they otherwise would not have. Insurance incentives can be lost if a policyholder leaves the NFIP and allows the flood insurance policy to lapse for any reason.
The phrase, “any reason” is emphasized because the NFIP doesn’t care why the policy lapsed. The lapse could be from a paid-off mortgage and the insured drops coverage. It could be that the policy was never paid on purpose or by accident. Or it could be that the policyholder went with a private flood option. Because the private flood market does not recognizing the rules and regulations of the NFIP, insureds can lose beneficial rating if they leave the NFIP for a private flood policy.
The loss of beneficial rating creates a scenario in which agents must “underwrite” between the NFIP and private flood in order to place flood business in a way that protects the insured and themselves.
Agents should develop diligent guidelines to accurately underwrite risks between the NFIP and private flood to fill the current gap in communication between the two. Agencies should consider an internal flood insurance placement procedure manual to take into consideration all the various questions that need to be contemplated when placing flood business.
Questions may include: Is there an NFIP policy in place on the structure already? Is there a penalty by leaving the NFIP? Does that penalty outweigh the benefit of the alternative market options? Is the structure even eligible for private flood?
Considering all the variables at hand, agents should underwrite their flood business for the consumer using a few easy steps that follow several best practices:
1) Understand the existing flood policy, if there is one. Review the declarations page for any type of beneficial ratings, such as grandfathering. If there is no policy in place, find out if the building can be grandfathered with the NFIP.
Check the flood zone as well. Some private flood companies care about flood zone, some are zone agnostic. Knowing the zone will give you additional information for placing the policy with the best carrier.
2) Understand the structure. Understand the loss history, since that could make the risk ineligible for many private flood options. Determine if the building is pre-FIRM (flood insurance rate map) or post-FIRM, which can indicate if an elevation certificate exists and, if one does, should be obtained and reviewed. Investigate the foundation and if there has ever been a substantial improvement, which is defined as building improvements of more than 50% of its pre-construction value.
3) Explore pricing and coverage options. If there is no flood policy currently in place, and no beneficial rating applies in step one, the risk is a blank slate, and all options can be explored with no forfeiture of NFIP beneficial rating. But as a best practice, always quote the NFIP alongside a private flood option to ensure diligence.
If there is an existing NFIP policy, provide a private flood quote and show the insured the options available and the differences in coverages. Sometimes, even if NFIP beneficial rating is lost, the benefits of a private flood policy may outweigh the penalties to the insured. Also, keep in mind that private flood is a relatively new product to many insureds and obvious statements such as, “this is a product from a source other than the NFIP” are good to review when first offering coverages.
4) Implement waivers and disclosures, then more waivers and disclosures. This is key to prevent errors & omissions losses and have the insured understand what product they are purchasing. No matter what the insured decides, waivers and disclosures need to be signed.
Some waivers and disclosures that should be considered include the standard waiver of agent responsibility form to disclose the loss of grandfathered and pre-FIRM benefits, waiver of coverage form for coverages not taken by the insured, the insured’s initials on all quote and application pages, and signatures on all required documents. If an insured allows an NFIP policy to lapse, another best practice to consider is to have the insured confirm in an email or written statement that they understand they could lose beneficial NFIP rates.
While these steps offer a general best practice to review options, pricing and coverage, the most important point is that agents should know the flood products they are selling.
This may seem obvious, but with the plethora of private flood products available, not all policy forms are created equal. Thoroughly read any policy forms and endorsements that come through the agency and to your clients. The worst time to realize there is a gap in coverage is when there’s eight feet of water in your insured’s house. Flow charts are helpful for agents to follow the various decision trees and are recommended for any procedure manuals prepared for your agency.
Following the four steps to underwrite your flood risks will begin to bridge the gap between private flood and the rules and regulations of the NFIP. It ensures that the best coverage is placed for our nation’s insureds and that overall, flood insurance remains an affordable tool for financial recovery. It also highlights the fact that private flood doesn’t necessarily “cherry-pick” the NFIP. Some of the best buildings that fit well into a private flood portfolio of business receive very low premiums and good coverage from the NFIP, such as elevated, compliantly built structures.
Bridging the gap can feel like an either-or situation. However, many instances exist where NFIP works in cooperation with private flood on the same risk. In Texas, preferred risk policies (PRPs) were used to buy a $500,000-per-building deductible on a large 62-unit apartment complex. Private flood offered additional coverage in excess of the PRPs.
In Michigan, a 22-building complex had four buildings in the Special Flood Hazard Area. The insured bought 18 PRPs and four private flood policies for their primary flood coverage. In many cases when the flood insurance gap is bridged, more property is insured and coverage is in place.
The private flood industry will continue to evolve, as will the NFIP. As they both evolve, gaps in how we do business will change, mostly for the better. For now, as during any evolution, challenges exist, and it remains the agent’s responsibility to close the communications gap and underwrite between the two separate worlds straddled by flood insurance.
Insuring our clients correctly means insuring our communities for resiliency and ensuring against errors & omissions exposure. As time goes by, our industry evolution will result in an ease of doing business for all of those involved. While that evolution occurs, our collective responsibility is to understand our roles, underwrite our risks and help increase the numbers of insureds in our country for flood insurance.
Risk Rating 2.0
While we work to bridge the gap at our own desks, what changes will the NFIP Risk Rating 2.0 bring to the future of flood insurance, our industry and the responsibility of our agent community?
Details of Risk Rating 2.0 have yet to be comprehensively released, but there is an understanding that future NFIP rates will more closely reflect risk. Risk will be measured with catastrophe models, similar to many private flood insurers. While just speculative, there is a possibility that grandfathered or subsidized rates could eventually be phased out either through Risk Rating 2.0 or legislative change.
But an end to beneficial rating doesn’t necessarily mean rate increases. One could imagine Risk Rating 2.0’s new rating methodology could lower premiums simply due to the risk characteristics and location of a structure.
The real value Risk Rating 2.0 brings is its ability to close the communication gap in the flood industry. Rather than being the marketplace to compare other policies, procedures and ratings, the NFIP could become part of a marketplace where it is quoted as a competitive option like any other private insurer. It takes the current process of comparing all programs to the NFIP as a standard and makes the NFIP part of a rapidly evolving and competitive environment where insureds ask to see a quote from multiple carriers and move between carriers, including the NFIP.
