Folks in coastal areas around the country, particularly in south Louisiana, are anxious about increases in their NFIP flood insurance rates. They are fearful that astronomical increases, such as one that was $572 when the policy was to incept on Sept. 30 then skyrocketed to $5,531 for an Oct. 8 start date, will destroy the economy of the state and put homeowners on a glide path to disaster.
They believe runaway rate hikes will depress property values, create affordability challenges and discourage participation in the National Flood Insurance Program.
If/when homeowners cannot pay the cost of flood insurance, the housing market will collapse. In the final analysis, mortgage lenders will be in the real estate business and real estate agents and brokers will be out of business.
Dire as the consequence of Risk Rating 2.0 may be for owners of residential properties, the marketers of private flood insurance take a different view of NFIP’s new rating scheme.
They see Risk Rating 2.0 as too little too slow and question whether the private market will be able to fill the NFIP hole left by years of inadequate rates.
The private flood writers appearing on a panel held at the WSIA convention on Nov. 17 in San Diego were John Dickson, president, Aon Edge, and Craig Poulton, CEO, Poulton Associates. The two were interviewed by John Weber for AM Best TV.
Dickerson and Poulton agreed that the NFIP’s Risk Rating 2.0’s methodology takes too long to raise rates and caps rates at a low level.
Poulton said the most serious issue is that 2.0 proposes to implement a more accurate, fairer methodology of rating flood insurance, but doesn’t promise to bring it to fruition for a decade. “While the method is good, no one will realize the benefits of it from the standpoint of funding the NFIP for many years.”
According to Poulton, David Maurstad, the senior executive of NFIP, indicated that about 25 percent of the rate increase that is needed would take place initially, and over the next five years about 25 percent more would be taken.
Five years out, Poulton said, “We have only taken a 50 percent approach to what is needed.” At 10 years, “we are only at 90 percent.” Poulton questioned how NFIP can dig itself out of the hole that it has by not taking more rapid increases. The consumer needs to be considered, he said, “but if you are going to implement a new fairer reality, it needs to reflect reality. The promise is there, but will the rates actually be increased apace considering inflation over the 10 years to get us to the where we need to be regarding rate.”
One other big issue, according to Poulton, is continuation of programs, such as the community rating system, … which “dislocates rates and makes them inaccurate.” Poulton also faults the “artificial upward bound” of $12,125, which he described as “a give-away to the wealthy” that likely will continue to encourage the development of large properties in locations where habitat will be damaged, where flooding is most likely, because they are getting this massive subsidy.
Dickson agreed with Poulton. “In the long term you are correct,” he told Poulton. Dickson explained that private insurance companies are not given a 10-year glide path to get to the appropriate, profitable, reasonable rate levels. “To have that time slip away, it is going to take a long time to fill that hole.”
Dickson is concerned about the unintended consequences of Risk Rating 2.0 in that it will create incentives for people to build in the areas where they don’t belong – higher risk areas.
In response to Weber’s question about the appetite of the private market, Dickson said that the size of FEMA’s program is a “behemoth” in comparison to any private market that is on the street today. Nonetheless, Dickson believes the global private markets “absolutely have the power to lead and guide the right solutions and get us to the right place.” He explained that the solution has to be connected. “It cannot just be the capital markets. It cannot just be the modeling community. It cannot just be the regulatory community. It has to be a connected unit of all of these stakeholders to make it work.”
Poulton said the private markets can be profitable in writing flood insurance. However, whether the NFIP will allow the private market to be profitable remains a question.
“We are already seeing an uptake on low hazard flood risk and various distribution methodologies being used to let folks buy low limit at a low cost and have some flood coverage,” Poulton said. He expects a significant uptake, but that will take time.
During two years (2013 and 2014), NFIP allowed a cancellation code for replacement of an NFIP policy with a non-NFIP policy. “At our website we saw significant growth during those two years, and then without explanation they withdrew that cancellation code.” Now people have about 30 days after they become aware their flood insurance rate has changed to find a producer who can find coverage in the private market, get it to their bank, get their bank to accept it, get their bank to tell the NFIP they are going to accept it, all before the bank pays the NFIP. So the NFIP has actually created an artificial barrier to the private market.”
Poulton’s take is: If the NFIP would cooperate with the private market, there would be more dramatic growth in the private market. “I don’t know if you can expect a government bureaucracy that has been acting as its own fiduciary to put away its own private interest to stay in business, if you will, and allow the private market in, but that would be tremendously helpful.”
Weber wanted to know what Poulton meant by cooperate with the private market.
Reinstate the reason code, and let consumers cancel an NFIP product and buy a private market product any time they want, Poulton replied. The NFIP had a reticence toward allowing cancellation of an NFIP policy, legitimately so, he said. The concern was that people would buy a policy, cancel it at the end of flood season and buy a new policy at the beginning of the next flood season. But when the flood policy is being replaced by a private market product, the customer has got replacement coverage.
“There is no reason we have been given by the NFIP that holds water,” for not allowing replacement in the private market, Poulton said. “They should let consumers buy what they want when they want.”
Unrelated to flood, more than a decade ago, Congress passed the Health Insurance Portability and Accountability Act, Dickson said. As the name implies, HIPAA made health insurance portable. It was seen as key for that industry that people could find the right health plans to meet their individual needs. As Dickson sees it, flood insurance also needs to be portable to allow people to make intelligent choices to meet their specific needs. “Portability is key,” he said
Cooperation would be great, Poulton said. He agrees that consumers should be able to cancel their policy and buy the policy they want.
Poulton said he believes that NFIP has “done a heavy lift” with Risk Rating 2.0. “I think the folks at the NFIP are wonderful people trying to do a hard job, and Risk Rating 2.0 is a step forward, but 10 years is way too long to get it right.”