By Joseph Rossi

With an estimated flood insurance protection gap of $40 billion in 2017, an emerging private insurance market has evolved. A great deal of caution needs to be taken when trying to protect your property from one of the most unpredictable perils. Where will the flood insurance market take us in the next 20 years? Only one thing is certain – it is a road of uncertainty. It’s been said that government involvement in insurance offers a large opportunity to private markets. And while that may seem to be the case as federal flood insurance rates rise, Congress will always have the final say. The National Flood Insurance Program is the federal government’s flood program. It’s where most Americans get their flood insurance, and it celebrates 50 years in 2018. The program was designed to give artificially low rates to homeowners who would otherwise depend on disaster assistance, and therefore taxpayer money, to recover from a flooding event. When Congress passed the NFIP in 1968, flood had been excluded from almost all major private insurance coverages. But now, the private market wants a shot again. Reinsurance and non-admitted companies are looking to invest hundreds of millions, based on the belief that NFIP premiums have skyrocketed too high, leaving room to compete. Additionally, they believe their technology can better model flood risk than the NFIP can. But there’s an obstacle: NFIP grandfathering provisions. In the NFIP, grandfathering keeps rates low if you’ve had a policy for a long time or built your house to the correct standards. But currently, if you leave the NFIP for a private policy, you can lose the lower rates from grandfathering since the federal flood program doesn’t recognize private flood insurance. Congress has proposals that will make grandfathering concurrent from the NFIP to private policies. It remains to be seen if the stalemate in Congress can be resolved to amend the issue. An additional challenge lies with the willingness of lenders to accept private flood insurance policies. The Biggert-Waters Flood Reform Act of 2012 attempted to help guide lenders on the best way to accept private flood insurance to meet the federal requirements. Biggert-Waters amends the Flood Disaster Protection Act of 1973 to make a definition for private flood insurance to meet the mandatory purchase requirement. Section 102 of the FDPA states “flood insurance coverage which is at least as broad as the coverage provided under a standard flood insurance policy under the national flood insurance program” will be sufficient to meet the requirement. However, this has caused more confusion for lenders. What does “as broad as” mean? The regulatory agencies (FDIC, OCC, etc.) have yet to issue their regulatory guidance for lenders, instead hoping for Congress to act. FEMA has also pledged that while the private markets continue to evolve, so will the NFIP. FEMA has for years talked about risk rating 2.0. The program, a total redesign of FEMA rates, is now slated for a phase in starting in 2020. This will bring rates much closer to the true risk of a structure, and more competitive with private market practices. FEMA is also committed to making new insurance products and revolutionizing the NFIP for the next 20 years and beyond. So, while there are challenges on the road to a robust private flood market, we will eventually get to a place where the NFIP is part of the marketplace, rather than being the marketplace. This will take time and an evolution over a period of years to find creative solutions to covering the always unpredictable peril of flood. Joseph Rossi, ANFI, CFM, is a Flood Specialist at Rogers & Gray Insurance. He can be reached at (508) 258-2103 or jrossi@rogersgray.com.