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Association of State Flood Plain Managers Association of State Flood Plain Managers
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Policy Matters! for February 2019
Friday, February 22, 2019

Policy Matters!

Larry Larson, P.E., CFM

Director 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 larry@floods.org so we have your input as we work on these critical issues.





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