Turbulent Year Ahead For Flood Insurance

Before the start of 2018, many predicted political and economic uncertainty.  This proved to be true of the National Flood Insurance Program and the flood insurance market.  In total, 2018 brought three program lapses lasting over eight days with seven short term extensions and a series of Federal Emergency Management Agency leadership and administrative changes.  Predictions for 2019 bring with it additional uncertainty.  With a new Congress, the introduction of a new rating system, and lending regulatory changes, 2019 could extend 2018’s flood insurance-related ebbs and flows.

When the new Congress started in 2017, House Financial Services leadership announced that flood insurance reform would be a priority.  At that time, the flood program was set to expire on September 30 of that year.  Early on, several controversial reform bills were introduced that stalled in Congress.  After the 2017 hurricane season hit, Congress changed focus, leading to short term extensions of the flood program.  In 2018, the short term extensions became more volatile leading to program lapses and week-long extensions.  In 2019, there may be more short-term extensions, but there is also hope for true reform.  Late last year, Congress voted on a standalone bill to extend the flood program to May 31 of this year setting up time for the new Congress to develop long term reforms.  House Financial Services Committee Chairwoman Maxine Waters has announced flood insurance reform as a committee priority.  Broad goals such as improved mapping, affordability, and a long-term reauthorization for at least a five-year time period should help stabilize concerns about the flood program’s turbulence. However, if consensus is not reached by May 31, more short terms extensions could plague the flood program.

While change is not new to the National Flood Insurance Program, this year the Federal Emergency Management Agency will introduce perhaps the largest change in the program’s history—Risk Rating 2.0.  The goal of Risk Rating 2.0, which is a redesign of the program’s rating structure and model, is to create a gradual rating system that relies less on flood zones and more on variables like source of water and building characteristics.  Elevation certificates will become less important, and whether a property is “in or out” of a particular flood zone will have less impact on the insurance rate.  Over time, the policy form will also evolve to include different coverages more in line with building type and category.

Little has been reported publicly around these coming changes, and some reports have mischaracterized Risk Rating 2.0’s goals and vision.  What we do know about Risk Rating 2.0 is that FEMA is working hard to incorporate better technology and modeling to modernize its rating structure.

Concurrent to the National Flood Insurance Programs transformation, the banks and other federally regulated institutions required to comply with the mandatory purchase of flood insurance requirement face changes as well.  The passage of Biggert-Waters Flood Insurance Reform Act in 2012 required lenders to accept private flood insurance to satisfy the flood insurance requirement.  However, many believe the provisions of the law confused the question of acceptability and slowed the desired growth of the private flood insurance market.  Several legislative attempts, and private industry efforts, since that time have focused on clearing up aspects of the law that cause uncertainty among some lenders.  Late last month the final rule was released by the FDIC related to private flood insurance and it is anticipated that the other agencies will follow soon.  While some uncertainty remains, with release of this final rule—which becomes effective July 1—it is expected that the lender acceptance of private flood insurance policies will expand which should be a boost to the growing private flood insurance market.

The risk of flood is one of the most destructive and unpredictable perils our society faces.  Because of this, there will always be a place for the federal government to be involved in flood coverage. As our understanding of flood risk changes, so will the ways we insure against it.  In 2019, we anticipate moving in a direction that our technology and experience has taught us we need to go.  Much is not yet determined, but 2019 should give us a solid indication of what the future of federal flood insurance will hold.