Leaders in the insurance industry anticipated that 2019, much like 2018, would be a tumultuous year for flood insurance with large catastrophic events, legislative impasse, administrative uncertainty. For the National Flood Insurance Program (NFIP) and private flood insurance, all were true and 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’s actions (or inactions) influence the industry. More 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 and proposed reform measures that have received mixed reactions from stakeholders. To add to the uncertainty, FEMA’s new rating system, Risk Rating 2.0 has seen immense pressure by Congress to be halted, and has now been postponed into 2021. And uncertainty in the marketplace for flood insurance remains as participation is low and losses mount with climate related events. What’s ahead in 2020? Its important to review 2019 to see where 2020 takes us.
The National Flood Insurance Program was started in 1968 by Congress after major flooding events caused vast uninsured losses. The National Flood Insurance Act of 1968 started the NFIP and requires periodic reauthorizations by Congress. The most recent long term reauthorization was the Biggert-Waters Act of 2012. BW-12, among other things, asked FEMA to increase artificially low rates in the program by 25% a year, establish higher penalties for lenders who do not enforce mandatory purchase, and define what “private flood insurance” is. But it also extended the NFIP for five years which give certainty that there would be no expiration of authority for the NFIP. An expiration of authority means no new NFIP policies can be issued or renewed. BW-12 expired on September 30th, 2017.
At the beginning of 2017, the US 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 moved through House Financial Services, but after the summer recess, and Hurricane Harvey, Congress focused on disaster appropriations and passed multiple short term extensions of the NFIP. When the Democrat majority took hold of the house in 2019, priorities changed, and Congresswoman Maxine Waters, the architect of BW-12, once again became the Chair of House Financial Services. Her focus was affordability, mapping, claims reforms and the availability of information on loss data.
In May, the House Financial Services Committee passed a flood reform and reauthorization bill unanimously. Within the House bill, key pieces of reform include 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 which allows 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 long standing issues with members of the House such as capping Write Your Own (WYO) compensation and is absent of 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 of the House or Senate on either. With a continuation of short term extensions, there appears to be a stalemate with no clear path forward. Currently, there is consensus there will be no long term reauthorization until after the 2020 election. This means more short term extensions, with possible short expirations as Congress remains indecisive on the future of the NFIP.
As we near 2020, politicians and stakeholders have turned their attention to Risk Rating 2.0. Risk Rating 2.0 is a redesign on how FEMA will rate structures. FEMA recently postponed Risk Rating 2.0, which was intended to be implemented in October of 2020. On November 1st, 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 November 7th, FEMA announced a postponement of Risk Rating 2.0.
There have been concerns by many that Risk Rating 2.0 will become Biggert-Waters 2.0. What Risk Rating 2.0 will actually do is, with new technology, communicate true risk. Rates will be modeled in advance in order to prevent the severe rating consequences seen in 2012. Questions remain about how Risk Rating 2.0 will affect premiums and 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 postponement, questions have been raised on 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.
In January, lending regulators issued their final rule on how to accept a private flood policy, and on July 1st 2019 it became effective. Even with the new rule, some questions remain that the industry hopes to receive answers to.
The final rule breaks the acceptance of private flood insurance into essentially two types of policies, those that lenders must accept if it meets the definition of private flood insurance found in the Biggert-Waters Act (mandatory acceptance), and policies lenders can consider, but don’t 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 they will accept no discretionary flood policies, and some private carriers have attempted to provide compliance aids. A memo from the 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.
The private market is also undergoing changes. As mentioned earlier, legislation that allows the continuation of grandfathering after leaving the NFIP, along with the elimination of other penalties that now exist remains unpassed. Legislation has also been proposed to reinstate the ability to move from the NFIP to a private flood policy mid-term, which was rescinded by FEMA in early 2019. There is debate if either of these provisions will substantially increase the private market participation, but no action has been taken on either. Instead, many see a difficult private flood market, with a decrease in capacity and increase in some rates.
2019 has determined the direction of the flood marketplace for 2020. With Congressional inaction, postponement of new NFIP programs, and a new frontier in private flood, uncertainty continues to exists. 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.