Flood insurance on the cusp of tremendous change
New selling opportunities for agents
By John Dickson
Jeanni Adame rides in her boat as she checks on neighbors in the Ashborough subdivision near Summerville, S.C., Oct. 5, 2015. (AP Photo/Mic Smith)
For many agents, writing flood insurance may be outside their comfort zone. Handling the National Flood Insurance Program’s (NFIP) elevation maps, coverage limitations and rising costs can give an agent a migraine, not to mention, staying abreast of recent legislative changes.
If you’re keeping up on current events, that may all be about to change, and when it does, it may introduce new selling opportunities to agents.
A property doesn’t have to be in a flood zone to experience a claim
An agent generally writes a flood policy because the property is located within a designated “Special Flood Hazard Area” (SFHA) and the mortgage company requires coverage. Of the 90 million residential structures in the United States, approximately 10% are located in a SFHA (Federal Emergency Management Agency, www.fema.gov
Why don’t property owners have flood insurance
Despite rising flood risks, less than 7% of homes and high-risk properties are insured for this peril.
“This allows agents to easily identify the properties where flood insurance is required; but offers little understanding of flood risk to the remainder of their policyholders,” said Keith Brown, president of Aon National Flood Services, Inc.
Only 2% of the flood insurance policies in force are in non-mandatory, non-SFHA areas, and yet they represent 24% of the losses paid by the NFIP (FEMA, 2015). This under-penetrated, under-served insurance market regularly suffers significant losses.
Sources of flooding extend well beyond hurricanes, river overflow and levee failure. Intense periods of rain inundation frequently generate regional flooding not connected to any meaningful source of standing water. Regional flooding sources include:
- Seasonal snowmelt activity
- Soil saturation
- Persistently wet meteorological patterns
“Flash flooding events are characterized by devastating water velocity, typically across denuded terrain, such as following a brush fire,” said Tim McCoy, managing director of Advanced Insurance Coverages, Inc. “As a result, almost every home in the United States bears some risk of flooding.”
The NFIP: Where are we now and how we got here?
The NFIP was created more than 45 years ago to provide a source of sustainable flood insurance for residential and non-residential properties. Since inception, the program has undergone tremendous change to respond to catastrophic floods, technology enhancements and shifting population centers.
In an effort to keep it affordable, the NFIP’s rates rely on subsidization and risk grandfathering. These pricing inequities contributed to the program’s $23 billion deficit in the wake of Hurricane Katrina and Superstorm Sandy, as detailed in the U.S. Government Accountability Office’s 2015 High Risk Report.
Related: 5 things you should know about flood insurance
That report further notes that Congress enacted the Biggert-Waters Flood Insurance Reform Act of 2012, followed by the Homeowners Flood Insurance Affordability Act of 2014. “These two sweeping reform measures provide, in part, a path to full-risk rates, gradually moving away from subsidization and certain grandfathering practices,” said Brown.
These new laws also impose surcharges based upon the occupancy of each property and require policyholders to pay reserve fund assessments, in addition to mandating the NFIP to implement premium rate increases.
It is important to note that while the new surcharges and assessments increase the total cost to homeowners, these charges are not subject to NFIP expense reimbursement. Agents do not receive commission on roughly 30% of the total charge to the homeowner.
Congressional reforms pave way for private flood insurance
The recent Congressional reforms also include a call to private markets to write flood insurance as an alternative to the NFIP, offering homeowners’ access to flood insurance options and educational information.
“We are seeing that as the NFIP’s costs increase, agents are contacting us and asking about alternative options,” said McCoy. “Over the next few years, agents will experience many interesting changes in the way flood insurance is marketed, written and sold. All of which should make an agent’s life easier.”
These new, private alternatives to the NFIP, coupled with multiple changes to pricing and coverage for products available from the NFIP underscore the importance of agent education. To deliver effective flood insurance solutions, agents must also understand the risk flood represents to individual properties and the landscape of insurance options available to specific homeowners. Homeowner education begins with agent education.
A driver attempts to navigate through high water on Northwest Highway during a heavy rain fall Friday, Oct. 23, 2015, in Dallas. The driver who was unharmed, abandoned the vehicle on the road when emergency responders arrived. (AP Photo/Tony Gutierrez)
Resources to assist agents in understanding flood risks
Historically, few resources offered any insight in the risk of flooding to individual properties beyond the Flood Insurance Rate Maps published by the NFIP. Agents must look beyond the NFIP for a better understanding of flood exposures.
Resources such as www.floodtools.com provide valuable information about individual properties using proprietary flood risk scoring and detailed mapping technology. An interactive website, FloodTools illustrates the estimated risk of flooding, demonstrates the number of flood claims in the region, and the average dollars paid across those claims.
Effective flood solutions also require a firm grasp of flood insurance options and the benefits and limitations of each. Traditionally, the NFIP provided flood insurance with residential limits up to $250,000, and various private markets offered excess coverage above the NFIP maximum.
While a few private insurance programs offered alternatives to the NFIP, none generated meaningful market share. The recent, sweeping Congressional reforms look to change that dynamic, and new private flood insurance options are rapidly entering the marketplace.
When exploring new private flood products, ask the following:
- What risks are covered? Some private flood products define basic terms, such as “flood,” differently. Understanding coverage nuances helps agents better explain options to consumers.
- How do product options interrelate? Product innovations, such as FloodWrapsm offer coverage for basements and additional living expenses, and are intended to operate alongside the NFIP to more fully protect homeowners.
- Which entities underwrite the products? This is a paramount topic, as different insurers have different capital structures. Require confirmation that the company offering the product has the financial strength to pay claims.
- Who is servicing claims and what standards are expected for claims service?
- What does the product cost? Consumers demand a complete explanation of the cost of flood insurance, including all surcharges, assessments and related fees.
Floods threaten many more homes than are currently protected from these potentially devastating natural disasters. Well informed insurance agents can offer meaningful assistance to consumers by helping individuals more fully understand the risk of flood and the options to mitigate that risk.
With the influx of new private products and web-based technology, agents may soon feel differently about writing flood insurance, particularly when they realize their policyholder doesn’t have to own a waterfront property to write their business.
Related: How insurance agents can counsel clients after a flood
John Dickson is President and CEO at Advanced Insurance Coverages, Inc. (AIC), a subsidiary of Aon National Flood Services (NFS), the largest processor serving insurance companies participating in the NFIP. AIC offers a suite of private flood products: EZ FloodSM, FloodWrapSM and Excess Flood. To learn more, please visit www.privatefloodchoice.com or contact John at (888) 888-2169 or firstname.lastname@example.org.