Tag Archives: federal emergency management agency

Future of Flood Insurance

Hurricanes Harvey, Irma and Maria laid bare fundamental inadequacies of the current flood insurance program in the U.S. Too few homeowners had flood insurance in place. Federal Emergency Management Agency (FEMA) flood maps were inadequate to encompass actual flood risks and, even more importantly, outreach programs by FEMA and the National Flood Insurance Program (NFIP) were inadequate to properly communicate risks to the market.

See also: Time to Mandate Flood Insurance?  

The current hurricane season revealed an astounding lack of resiliency in the U.S. on many levels: (1) lack of insurance coverages; (2) inadequate mapping of flood risks; (3) failure to properly educate homeowners about their actual flood risks; and, (4) gross under-investment in resilient infrastructure by all levels of U.S. governments.

As Congress prepares to slash budgets and cut taxes, the fact that Hurricane Irma easily topped City of Miami’s sea walls with only Category 1 strength winds and brought a four-foot river of water down Brickell Avenue, the center of Miami’s Financial District, shows how much work needs to be done to achieve resiliency in just one U.S. city.

In its rush to reduce taxes, Congress is ignoring the U.S. infrastructure deficit, which is estimated to be in the multiple trillions of dollars by the American Society of Civil Engineers. The slide deck that I prepared for the Future of Flood Summit discusses new, cost-effective tools for flood risk modeling, flood risk report production and flood risk communication. A central theme is: “Can the insurance industry do a better job of helping insureds and societies cope with the increasing risks they are facing, as our climate changes and sea levels rise?”

You can find the presentation here.

A ‘Perfect Storm’ of Opportunity (Part 3)

This is the third of three parts in a series. The first part is here, and the second is here. 

Change isn’t always easy. If you’re an insurance agent or Write Your Own (WYO) dealing with the April 1, 2016, regulatory changes to the National Flood Insurance Program (NFIP), you know this all too well. As the Federal Emergency Management Agency (FEMA) continues to phase out various rate subsidies, agents are dealing with increasing policyholder concerns around rate increases and affordability.

These regulatory changes inject new complexities into an already complex program. For agents trying to serve their customers in this space, it’s challenging to stay ahead of the NFIP changes around eligibility, pricing and flood zone determination — all while making time to absorb periodic, substantive modifications. Furthermore, increased regulatory scrutiny creates greater demands on agents because producers must invest additional time to ensure compliance. These dynamics generate new frictional costs that leave many agents feeling like there’s less return for their efforts.

Homeowners have also felt the impact of the rapidly evolving flood insurance environment by means of increased costs and added requirements. Those interested in buying flood insurance or in maintaining existing flood insurance are faced with shifting price points and new steps in the application process. Just recently, pockets of homeowners in South Carolina were newly mapped into mandatory purchase areas, forcing some mortgaged properties to purchase flood insurance for the first time. Such changes can impose significant burdens on homeowners, particularly those on fixed incomes.

See also: Why Flood Is the New Fire (Insurance)

Strategies for Managing Through Change

While regulatory changes to the NFIP may make it difficult for agents to sell flood insurance, emerging options can offer relief. Previously, if a prospective consumer rejected flood insurance because of price, agents often did not have an alternative. Today, this is not the case.

Keith Brown, the president and CEO of Aon National Flood Services, said, “The NFIP offers a widespread product, and that has significant application in today’s environment. … However, agents will find that there are some customers who may not be an appropriate fit for the NFIP. Now, agents can present options for policyholders who struggle with affordability issues if charged full-risk rate premiums. These agents are able to present coverage options more tailored to individual homeowner needs in terms of lifestyle, financial planning and risk exposure.”

There are some strategies for flood risks that agents can adopt to help manage change through an evolving regulatory environment and shifting consumer appetite. First, it is important that agents are mindful of map revisions and the fluidity of the geographic risk associated with flood. Mapping changes drive pricing and surcharges applied to individual risks. For instance, a customer who wasn’t required to have flood insurance yesterday may be required to have it today.

Innovations and opportunities in this business do not follow a set schedule, and agents seeking means of differentiation must be vigilant. With the proper education and tools, flood insurance offers a means for agents to help customers better protect themselves and their investments. Talk to your WYO; familiarize yourself with product choices your customers may find attractive if they’re struggling with the impact of regulatory changes.

When looking at the newly mapped areas as defined by the NFIP, there is a distinct line that defines the area where homeowners must have flood insurance as a condition of having a federally backed mortgage. On the other side of that line, homeowners are not required to have flood insurance to mortgage their home; however, floods do not recognize these lines. In many cases, the homes sitting on the non-insurance-required flood zone lines have just as much of a chance of falling victim to a flood catastrophe. So, as an agent, understanding flood maps and knowing how properties may move in and out of different flood zones is invaluable in educating your customers and helping them determine what insurance they may or may not need.

There’s no doubt that, in today’s ever-changing environment, a long-term strategy is difficult for agents. A basic understanding of the requirements surrounding floods will get you by. But if you want to have the opportunity to be more successful and be viewed as a valued business adviser and resource for homeowners in your community, you have to be able to look beyond the basics of flood.

By taking on a more holistic view of flood, recognizing how floods can affect communities and having the ability to articulate all flood options (including private solutions), you can set yourself apart from others adrift in a sea of change.

For an overview on the NFIP changes, check out a handy visual guide NFS has put together: “Making Sense of NFIP Regulatory Changes.”

A ‘Perfect Storm’ of Opportunity (Part 1)

This is the first part of a three-part series on the innovation needed in flood insurance.

If you are an insurance agent trying to survive in today’s competitive marketplace, you may have dipped your toes in the flood insurance waters, so to speak. If you have not, get ready to jump in, because there’s a “perfect storm” of opportunity ahead.

Flood insurance is a vastly under-penetrated market. According to a recent report from the Federal Emergency Management Agency (FEMA), approximately 10% of U.S. residential property is located in areas where flood insurance is required for federally backed mortgages, yet fewer than half of these homes carry the coverage. Total penetration in the U.S. is less than 7% for the roughly 95 million residential structures.

That 7% penetration is compelling when you think about the prospective flood universe. Every single state in the country has suffered flood losses. So the question becomes: How do we leverage the opportunity to expand flood insurance beyond those 7%?

When you consider the current state of the industry and of the National Flood Insurance Program (NFIP), the climate is ripe for change. The federal program is upside-down by $23 billion, resulting in additional fees and charges, and the Biggert-Waters Flood Insurance Reform Act of 2012, followed by the Homeowners Flood Insurance Affordability Act, injected new complexities into the NFIP. These — and related — conditions have created a “perfect storm” of opportunity to grow the number of homes that buy flood insurance.

See also: Why Flood Is the New Fire (Insurance)

Taking Advantage of Emerging Private Flood Options

Legislation has paved the way for private flood insurance, which has come in response to different markets having different views and different appetites for risk, and additional measures pending in Congress further clarify the critical role of private flood insurance. Those diverse interests or private markets call for the independent development of product and service solutions to address various flood insurance needs and to differentiate their programs from others. The resulting innovation and product specificity directly benefits consumers. Accordingly, the conversation around flood has really evolved from “What is private flood?” to “Why now private flood?”

One significant challenge for agents will be helping consumers understand that flooding (unlike earthquakes or hurricanes) is the only natural disaster where people actually influence the event itself. Whether through urbanization, the clearing of land for agriculture or artificial levee systems, we influence where floods happen and the severity of floods when they happen. Areas that were not in danger yesterday are exposed today. Private industry has an opportunity to help educate Americans on how these changes drive future flood risk through modeling techniques and data analytics.

We need to help homeowners understand that yesterday’s safety does not necessarily equate to safety today. I see this playing a pivotal role in helping educate homeowners on their true risk of flood.

Getting an Edge in a Competitive Marketplace

Education remains a critical charge for insurance agents who want to obtain an advantage in this evolving market. Agents want loyal customers, and a flood insurance solution represents one more policy that agents can deliver to deepen existing relationships. From my perspective, there are fundamental strategies to employ to your advantage:

  • Understand the impact of flood in your area

Every state has been touched by flood, so the risk is widespread. By familiarizing yourself with the history of floods in the areas where your agency is operating, you will better understand the potential impact to your customers.

  • Get to know your customer

Does your customer have a man cave in the basement? Is your customer living in a high-value home? Is your customer in a home that is not elevated or that is exposed to flood more than other homes? Is your customer at risk of being displaced for weeks or months at a time if flood happens? That knowledge will help an agent determine what is appropriate for a client and then to match those specific needs with product options in the private market.

  • Leverage flood tools available

Take advantage of tools that enable independent assessment of flood risk outside of FEMA flood maps. For example, through www.floodtools.com, agents and homeowners can learn about their potential exposure to flood. By entering an address, they receive an easy-to-understand visual representation of where they are positioned with respect to floodwaters and flood plains.

  • Stay current in the evolving product environment

New, more relevant private products are becoming available every day. Staying informed in the changing product environment will help improve your ability to meet the diverse needs of customers with contemporary offerings such as:

—Additional living expenses

—Enhanced basement coverage

—Increased limits for various risk classes

  • Be clear on who is backing the product and the capital structure behind it

There is an abundance of capital looking for new business to write. Know who is backing the product and the capital structure supporting the private program. Consider the financial strength and financial rating of the insurer and inquire about flood underwriting experience.

See also: Modeling Flood — the Peril of Inches

Setting Course for the Challenges Ahead

We are seeing a lot of interest in the flood space and the emergence of a host of new products. Many employ a so-called “coupon” approach by offering a percentage discount on the NFIP premium, but they haven’t changed the experience at all. Agents still need to manage extensive applications, an elevation certificate and property photographs. The experience needs to be improved, for the agent and for the customer.

Are there opportunities for agents to sell flood insurance on a larger scale? Certainly, but more work is necessary to make that happen. When it comes to flood insurance, we need to find solutions attractive to both agents and homeowners for the purpose of increasing overall participation. We need to address the existing challenges. Constituents entering this space cannot solely focus on a price-to-coverage configuration angle. Ultimately, without product and service innovation, we can’t expand the market.

Returning Insurance to Its 19th Century Roots

As we celebrate the Wharton Risk Center’s 30th anniversary, we are at the same time envisioning the future of risk management. In this spirit, I would like to make the case that the insurance industry return to its 19th century roots by requiring those at risk to undertake cost-effective loss-reduction measures as a condition for insurance coverage. Back to the future!

This is the way that factory mutuals operated when they were founded in the mid-1800s, and some insurers still do today when marketing commercial policies. Firms were given an insurance policy only after they were inspected and shown to be safe. Insurance premiums reflected the best estimates of the risk; improvements were rewarded with lower premiums, reflecting the expected reduction in future claims. Firms that did not continue to keep their factories operating safely were warned that their insurance policy would be canceled unless they took corrective action.

Insurance could play a similar role with respect to providing coverage to the residential sector where, today, limited attention is given to encouraging homeowners to invest in loss-reduction measures. Premiums should reflect risk, and risk information should be communicated in a transparent manner so decision makers have accurate signals. Those at risk should also be made aware of the reduction in premiums they could receive.

Public-private partnerships are necessary for dealing with insurance against some extreme events. Low-income individuals residing in hazard-prone areas are likely to demand financial assistance if their premiums are subsidized and the increase in the cost of their insurance raises issues of affordability. Even in situations where insurers are allowed to charge risk-based premiums, they may still feel that some hazards are uninsurable without public-sector involvement if catastrophic losses would cause their surplus to be reduced to an unacceptable level and perhaps lead to insolvency.

The National Flood Insurance Program (NFIP) offers an opportunity to creatively address these issues with regard to flood hazards. The Federal Emergency Management Agency (FEMA)’s technical mapping advisory council has already begun focusing on ways to design flood maps that reflect risk, and several reports by the National Research Council are addressing ways the flood insurance program can be modified in advance of its renewal in 2017. More specifically:

  • Updated flood maps will allow insurers to more accurately assess the hazard. If private insurers can charge risk-based rates, they would have an economic incentive to market flood coverage.
  • The public sector could provide financial assistance to low-income homeowners to address issues of affordability and encourage them to undertake cost-effective measures to reduce their risk. One way to do this is through a means-tested voucher program tied to low-interest loans. Well-enforced building codes and seals of approval would provide an additional rationale for undertaking loss-reduction measures.
  • A multi-year insurance policy tied to the property would prevent policyholders from canceling, as many do today when they have not made a claim for several years. Property owners would be provided with stable annual premiums and would know that they were protected against water damage from floods and hurricanes.
  • Reinsurance and risk-transfer instruments marketed by the private sector could cover a significant portion of the catastrophic losses from future floods. Some type of federal reinsurance would provide insurers with protection against extreme losses.

The broader challenge we face is developing long-term strategies that provide short-term rewards so that change is politically viable. There is a growing interest by policy makers and other stakeholders in ways that insurance can encourage individuals, firms, communities and countries to undertake protective measures.

Insurance has an opportunity to play this role in the residential sector by going back to its basic principles that were adopted almost 200 years ago from the commercial side of the house: encourage or require investments in loss-reduction measures today while providing claims payments should one suffer a severe loss.

The full Wharton risk newsletter is here.

Claims Lessons From the Feds (Truly)

The federal government is likely not the first place you would look for innovative inspiration and lessons on implementation. The old stereotypes of stacks of paper gathering dust in corners, outdated technology and endless processes still exist to some degree, but the government is making huge strides in the digital space, and insurers can take note.

Recently, I read an article from Yahoo Politics about some new features on FEMA’s (the Federal Emergency Management Agency) mobile application. The app has been around for nearly three years, but in the last few months FEMA has rolled out social media features and geo-spacial weather alerts that allow the app to be customized to users’ own experience before, during and after a disaster.

Claims organizations can learn these lessons and offer some of these features to customers. For example, following a disaster, the FEMA app now has a “Disaster Reporter” tab where survivors can upload pictures from their phone and also view other photos or damage or loss of property. If applicable, companies could offer the same services for its customers following a major disaster; it could build a sense of community and also offer insurers valuable information shared directly from the disaster source.

Not only would insurance companies benefit from having this capability for their own use, but now they can also leverage information being gathered and publicly accessible directly from FEMA. Claims organizations can also verify data being uploaded from a disaster zone to filed claims. This capability is part of a systemic change in claims where data can be gathered and analyzed from both internal and external sources. In addition, because FEMA is taking a step to modernize its messaging through mobile applications, the agency is making the country more prepared and more resilient, which equates to less risk of loss of property after a disaster.

The government will only continue to modernize its public services. While they don’t move at the same rate as private enterprise, what we are starting to see is unique sets of public data gathered by the government that can be repurposed in insurance. The privacy and verification of taking data from the government remains to be seen. But for now, the playing field looks promising to capitalize on these opportunities.