The Louisiana Department of Insurance Office of Consumer Advocacy and the Louisiana Civic Coalition collaborated to present the Hurricane 2022 Virtual Summit on April 27. During the summit, viewers received information about FEMA’s Risk Rating 2.0 program, the Fortified Homes Program and the critical components of the homeowners insurance policy.
Panelists included Julie Shiyou-Woodard, president and CEO of Smart Homes America; Gilbert Giron Jr., FEMA, and Ron Henderson, deputy commissioner of the LDI Office of Consumer Advocacy and Diversity. The panel was moderated by Ron Camarota, LDI Office of Consumer Advocacy and Diversity.
In explaining what a smart home is, Shiyou-Woodard told webinar viewers that a smart home needs to first be resilient to wind and water, properly insured and energy efficient, and only then use smart technology, such as a refrigerator that does the grocery list and sends the list to the store.
“We know that building codes, when enforced, work,” Shiyou-Woodard said. If building codes are adopted and not enforced, then they are not working, she said.
Citing statistics from Core Logic, Shiyou-Woodard remarked that 64 percent of homes in America are underinsured by an average of 24 percent. That means a $200,000 home is underinsured by $48,000, so the homeowner needs to have $48,000 in the bank to fully recover from a total loss.
When homeowners buy insurance, she said, most are not considering what it will take to rebuild their homes. “Right now, because of the pandemic, the cost of materials, supply chain issues and the cost of labor, the cost to rebuild your home is way more than you think it is,” Shiyou-Woodard said. Agents have not had a chance to catch up with that, she said and let homeowners know they are underinsured.
After getting three bids for what it would cost to rebuild her home in Mobile, Alabama, she knows it costs $175 per square foot. Still, she had a hard time convincing her agent that she needed that much insurance.
“We all know that one in four businesses do not reopen after a disaster,” she said. “That is because 75 percent of businesses are underinsured by an average of 40 percent.” She pointed out that 40 percent of $500,000 is $200,000.
In explaining the Fortified Homes Program, Shiyou-Woodard said the program is successful and the designation is good for five years. Homes built to Fortified standards result in lower insurance rates for homeowners in many states, including North Carolina, South Carolina, Mississippi, Alabama and Louisiana, according to the Smart Homes website.
A bill to fund a Louisiana Fortify Homes Program within the Department of Insurance is pending introduction in the Senate. House Bill 612 by Rep. Mike Huval, R-Breaux Bridge, passed the House May 9 on a 94-3 vote.
According to Shiyou-Woodard, the Insurance Institute for Business and Home Safety created the Fortified Homes Program based on more than 20 years of storm damage data collected by IBHS.
She explained that the roof is the first defense against a storm. The Fortified roof helps homeowners keep their roofs on and keep water out during hurricanes, high winds, hail and severe thunderstorms. The focus is on the roof since the private insurance market does not insure flood, so most of the property insurers’ claims are water intrusion through the roof.
There are various levels of the Fortified designation, with a Gold home having a continuous load path and resisting damage from Category 3 hurricanes.
Relative to IBHS, Shiyou-Woodard said, “They are all Ph.D.s. All they do is build structures and blow or burn them down.”
To illustrate the effectiveness of Fortified Homes, Shiyou-Woodard said there were 17,000 Fortified Homes threatened in Hurricane Sally which made landfall on the Gulf Coast Sept. 16, 2020, as a Category 2 storm. Of those 17,000 homes, 95 percent had little or no damage and no claim; there was not enough damage to trigger a claim. The damage that did occur was often the result of a tree falling or damage to a car or outbuilding.
She compared damage to homes with sealed roofs to those with unsealed roofs resulting from a 2011 storm. The damage estimates in 2011 dollars adjusted for 2020 inflation were $6,143.53 for a sealed roof and $19,236.46 for an unsealed roof. The sealed roof is required for the Fortified designation.
Shiyou-Woodard pointed out that the SBA loans more money if a home is designated Fortified.
In the photos from Grand Isle, the homes with the Fortified designation appeared relatively unscathed even though they had been through a Category 4 storm.
With the Fortified Home Program, “You are on the path of a resilience paradigm in Louisiana,” she said.
NFIP Risk Rating 2.0
Giron told viewers that the National Flood Insurance Program has five million policies in partnership with Write Your Own companies, which maintain policies on behalf of NFIP. The NFIP has $1.3 trillion of in-force coverage and 22,525 communities participate as of May 2021.
When the NFIP was created in 1968, the program was supposed to be self-sustaining, Giron said; however, the NFIP had $17.5 billion in claims in 2005, and the old system is “not sustainable.” Since 2005 NFIP has paid out a record $1.2 billion in claims each year. Currently, the NFIP is $20.5 billion in debt.
Nearly half (49 percent or 1,708,427) of NFIP policies on single family residences are preferred risk policies for which homeowners pay an average annual premium of $498. Preferred risk policies will not be offered under RR-2.0 because risk was not being “captured,” according to Giron.
The number of policies grandfathered has been “whittled down,” he said, and there currently are 165,431 policies (4.8 percent) grandfathered, which have an average premium of $1,082. Many of the grandfathered policies already have transferred to full risk policies with an average premium of $936, according to Giron. There are 993,192 (28.8 percent) full risk policies, which will be on a glide path to a full risk rate based on individualized characteristics. “The objective is to bring all policies to full risk rate,” he said.
Other categories are the pre-FIRM subsidized properties which total 374,181 (10.9 percent of NFIP single family homes) with an average annual premium of $2,489, and newly mapped properties which total 170,845 (5.0 percent) with an average annual premium of $688.
As Giron describes it, the starting point is the rate under the legacy system. The rate will then be increased at 18 percent each year until policies reach their full rate. The objective, he said, is to get the NFIP financially sound. “That gives us the latitude to decide how rates are determined.”
Another rate category is high risk coastal zone which has 12,289 (0.4 percent) of the NFIP policies, at an average rate of $5,470.
In essence, he said, the legacy system would have lower value homes subsidizing the higher value homes. He contends that two-thirds of policyholders with older pre-FIRM homes will see premium decreases nationwide and that higher value homes will see premium increases.
Giron emphasized that under RR-2.0 flood zones and base flood elevation will not be used as primary factors to determine risks. In addition to BFE and flood zones, under the legacy system foundation type and structural elevation were factors used in rating.
Under RR-2.0 other variables will be used, distance of flooding source and flood type, building occupancy, construction type (masonry gets a discount), foundation type, ground elevation, first floor height, number of floors (not including basements and enclosed crawl spaces) and prior claims, which will be held in abeyance until after the first claim. Not considered as losses are the increased cost of compliance and claims closed without payment. After 20 years, claims will fall off of a home’s history.
A greater number of floors is a mitigating factor in that “the more floors, the less chance of a total loss,” he said.
Under the new system, Giron said, “We are incentivizing mitigation.”
Instead of having policyholders purchase an elevation certificate, “now we will just ask how high the first floor is from the ground.” Even though the elevation certificate is not required, they can still be used. Elevation certificates still will be used for flood plain management and community rating.
The legacy system considered only riverine and coastal flooding; RR-2.0 will consider storm surge, tsunami, inland flooding and great lakes, according to Giron. “In reality there are structures that could be subject to multiple flood perils.”
In addition to NFIP’s data, RR-2.0 will take into account additional data sources, such as commercial data from third parties.
Previously policyholders had to insure to 80 percent of value or the policy was actual cash value; whereas, now all policies will be replacement cost, Giron explained.
There are fees and surcharges in addition to premium payments. The fees and surcharges that are not part of the premium include an assessment for reserve of up to 18 percent; and HFIAA surcharge of $25, policy fee of $47 and a probation surcharge.
There are statutory discounts, such as pre-FIRM and for newly mapped property.
Giron pointed out that a policy loses its discount and glide path if the policy lapses for more than 30 days. In that case the property is considered new business and gets the full risk rate.
Regarding the community rating discount, Giron said the new pricing method provides that every structure in the community can get the discount. Those discounts range from five percent to 45 percent, but noncompliant structures are not eligible.
There are mitigation discounts, for things such as machinery and equipment above the first floor, flood venting and flood proofing.
What will not change with RR-2.0 is the mandatory purchase requirement, special flood hazard areas, community compliance, flood insurance rate maps, maximum coverage limits of $250,000 for the residential structure and $500,000 for nonresidential, underwriting forms and the assignment of a flood policy to the new property owner, which should be done at closing.
There are 495,000 flood insurance policies in Louisiana, leaving 1.2 million single family homes not covered for flood. The average claim payment in Louisiana is $56,400, according to Giron. Under RR 2.0, 101,174 policies in Louisiana are expected to get an immediate discount; 343,246 policies will get an increase between $0.0 and $10 per month; 34,352 policies will get an increase of $10 to $20 per month, and 17,159 policies will increase more than $20 per month.
Know your homeowners policy
“The worst time to read your insurance policy is after you have a loss,” Henderson told the virtual audience before explaining the critical components of a homeowners insurance policy, such as coverages, limits, deductibles, exclusions, endorsements, mitigation credits and the claims process, including actual cash value versus replacement cost.
Before a loss, Henderson said, a policyholder’s responsibility includes knowing what’s covered and excluded, knowing the market value of the home, notifying the insurer of improvements to the property, reviewing the policy for adequate coverage, taking a home inventory and maintaining the property.
He addressed the homeowner’s responsibility after a loss, including mitigating damage, and the insurance company’s responsibility after a loss.
He talked about a couple of instances when he received complaints about insurance companies, and he had to explain to the complainants that their losses were not covered.
In the first instance, a woman complained because the insurance company canceled her policy shortly before a storm. What Henderson discovered is that in filling out the application, the woman indicated that she did not have a dog. During the inspection period, the company discovered a pit bull in the woman’s front yard. The company notified her that she would have to get rid of the dog or the policy would be dropped. She didn’t. The company did.
Henderson said the policy was actually void when the woman lied on the application.
Just last year, in LaPlace, a woman came to Henderson saying she needed her additional living expense because she could not live in her house while it was being repaired. She said that her insurer declined to pay additional living expenses. Henderson asked what caused the loss. She told him her home had five and one-half feet of water in it. Henderson asked if the water came through her roof. She told him that the water came from the street; whereupon, he had to explain that her policy paid for additional living expenses when there was damage by a covered peril, and flood is not a covered peril in a homeowers policy.
“Imagine how hard it is to tell someone sitting in front of me with her three kids” and nowhere to go that flood is not covered. “That was very hard for me,” he said.