Policy Matters! for February 2019

Feb 22, 2019 | News & Views, What's New

Policy Matters!

Larson, P.E., CFM

Emeritus – Senior Policy Advisor, ASFPM

Private flood insurance has
been part of the NFIP reauthorization for the past seven years, but
particularly the last two years. Why should flood risk professionals care about
how or why the private sector enters the flood insurance market? Let me start
by explaining that the private sector had little to no interest in flood
insurance 50 years ago when the NFIP was first authorized. They indicated they
had no information on where flooding would occur, and the randomness of
flooding, along with the fact flood claims would be concentrated in large areas
that would flood, meant regular homeowners insurance would not cover flood losses.

What has changed in the last 50
years that suddenly has private flood insurance companies interested in selling
flood insurance? The two biggest changes are likely: (1) flood maps now cover
about 40 percent of the nation’s floodplains, so private companies now have
data showing them where flooding will occur in many places; and (2) private
insurance companies can now share their risk with global reinsurance companies
to even out the large claims spikes that might occur in major flood events.

So why would anyone care if
private flood policies take more and more of the flood policies in the nation? On
the plus side, having more buildings covered by flood insurance protects the
home investment of more homeowners in the nation. So what is the negative side?
The key thing to remember is that NFIP policyholders pay a fee every year that supports
about 40 percent of the cost for flood mapping and pays all the costs of
helping over 22,000 communities manage their flood risk. This includes FEMA
staff, but also cost-sharing for some state staff to train and audit local
floodplain managers who advise local officials on development to better manage
flood risk.

Up until now, lenders could
only accept flood insurance policies that were “at least as broad as” the NFIP
policy (as directed in the Biggert-Waters Flood Insurance Reform Act of 2012). The
agencies that regulate lenders, however, have just issued new rules that
provide an exception for lenders to accept any private policy if the lender
feels it protects the lender’s investment.

This sets up three large concerns:

that lenders may accept policies
with variations such as high deductibles or without ordinance and law-type
coverage that provides for meeting updated building elevation or code
requirements, which may leave the homeowner unable to rebuild because the
claim payment is so small;

a longer-term threat is that many communities
may drop out of the NFIP because their citizens who must have flood
insurance can now buy from private insurers that the lender will accept. Many
communities only joined the program so their citizens could get flood
insurance, which until recently was only available from the NFIP. And a
number of those communities do not enjoy having to administer a floodplain
management ordinance (a basic requirement of joining the NFIP)—so ASFPM is
concerned that potentially thousands of currently NFIP participating
communities may drop out of managing their flood risk, unless other
policies or incentives are in place to alter this scenario; and

that policy fee revenue supporting
mapping and floodplain management would drop unless private policies
include an equivalent policy fee to be paid to FEMA. ASFPM has suggested
that private flood policies sold to satisfy the mandatory purchase
requirement be sold only in NFIP participating communities and that
private flood policies include an equivalent policy fee.

ASFPM and a number of other
organizations are working to overcome these threats, which we believe can be
resolved in a win-win scenario. But it will take efforts from many floodplain
managers across the nation to educate local, state and national decision makers
on the implications of major actions like this and the value of retaining the
flood risk management and mapping functions of the NFIP as the private flood
market develops. Keep watching our newsletters and social media posts to stay
abreast of these issues. Send us your comments and questions to
so we have your input as we work on these critical issues.