Tag Archives: nfip

Now Comes the Flood Season

We’re entering a flood season where one-third of Americans are expected to experience flood events, after which we’re forecast to see above-average hurricane activity. With people already experiencing financial shocks from COVID-19, it is all the more important that we take steps now to prepare for flooding. 

We need three things: rapid innovation from the Federal Emergency Management Agency (FEMA), long-term authorization of the National Flood Insurance Program (NFIP) and the removal of regulatory barriers around private flood insurance.

1: Rapid FEMA Innovation

FEMA’s response to COVID-19 was swift and decisive: It extended its flood insurance premium payment grace period to 120 days (from 30). This offers homeowners breathing room and will go a long way toward ensuring homeowners maintain the protection they need while juggling other financial commitments.

The agency has also provided guidance for remote claims adjusting, which makes it possible for policyholders to have a flood loss adjusted without an adjuster physically visiting the property. This guidance lets everyone comply with social distancing directives.

These actions illustrate the agility and innovation FEMA is capable of. To ready homeowners for 2020’s flood season, we need more of this, in areas that go beyond direct responses to COVID-19.

While there are some actions FEMA can take today, the most important changes would require action from Congress.

2: Long-Term NFIP Authorization

NFIP authorization is set to expire on Sept. 30, in the midst of the 2020 hurricane season. This is incredibly dangerous. 

We’ve been lurching from short-term authorization to short-term authorization since 2017. The lack of long-term authorization creates uncertainty that could cause further financial damage to a population already reeling from record unemployment. This would happen via two mechanisms.

First, an NFIP with lapsed authorization cannot write new policies or issue renewals. This has the first-order effect of leaving millions of Americans without flood protection. Just as crucially, the lapse could also cause real estate transactions in some areas to halt, as mortgage lenders will not issue loans in these areas without proof of coverage.

For an industry already strained by COVID-19, a lapse would be disastrous.

Second, without long-term authorization, the NFIP’s ability to borrow from the Treasury is severely reduced, which could jeopardize its ability to pay claims. After a flood, homeowners with insurance might be delayed in collecting benefits they depend on to rebuild their homes. It’s hard to overstate how devastating this could be, particularly in light of current economic conditions.

See also: Need for Context in Assessing Flood Risk  

3: More Common Sense Around Private Flood Insurance

Today, homeowners with private flood insurance who decide, for one reason or another, that they want to switch to an NFIP policy aren’t considered to have had continuous coverage, which can make them ineligible for subsidized NFIP rates.

In today’s flood insurance landscape, where private products are increasingly available and robust, this policy no longer makes sense. But FEMA seems unable to update it without authorization from Congress.

It is incumbent upon Congress, therefore, to update eligibility guidelines so that Americans who have maintained continuous insurance coverage are eligible for subsidized NFIP rates. Without those subsidies, cash-strapped homeowners might opt to forgo flood insurance altogether, meaning that, in the event of a storm, they become wholly dependent on emergency FEMA resources rather than benefits from a policy specifically designed to help them recover and rebuild.

To Prepare for 2020’s Flood Season, We Need Support From Lawmakers

Much flood preparation happens at the individual homeowner level.

But we can’t expect collective, nationwide resilience to flood events without innovation from FEMA, and we can’t achieve that without decisive action from Congress. We need long-term NFIP authorization to ensure that homeowners have coverage when waters rise and regulations that acknowledge the validity of private flood insurance to ensure NFIP subsidy access to homeowners returning to NFIP policies.

Without both, we risk augmenting financial distress for both individual homeowners and the larger economy, neither of which we can afford right now.

Micro-Censusing: Future of Flood

The ability to micro-census – that is, to gather granular data about individual homes and businesses and use it to inform underwriting – will lead to the biggest changes in flood insurance since the launch of the National Flood Insurance Program (NFIP) in 1968.

Most visible among these changes will be the transformation of NFIP policies and the rise of private flood insurance, which micro-censusing makes possible (read: potentially profitable at scale) for the first time. Here, I’ll examine the rise of micro-censusing in insurance; its likely applications in the flood market; and the potential impact on NFIP and private products, the agents selling them; and the Americans they’ll protect.

The Rise of Micro-Censusing and Its Applications in the Flood Market

In the last two decades, innovation in the insurance industry has been powered by better data. Data collection from smart devices is changing how health and auto insurers price policies, and data from services like Google Maps is changing how underwriters assess business insurance applications.

In homeowner’s insurance, providers are pulling publicly available, address-specific data – from roof type to proximity to a fire hydrant – and feeding it to algorithms to assess risks.

All of these can be considered examples of micro-censusing because they use data at the individual rather than demographic level to determine risk, which makes for much more accurate assessments.

Now that readily available tech makes micro-censusing possible and practical, it’s become wildly popular. With micro-census data, insurance providers can price policies more accurately and manage risk far better than was historically possible.

This is a boon for markets like flood, where existing risk models are often outdated. Micro-censusing makes it possible to assess risk on a property-by-property basis in something close to real time. 

In practice, this means, for example, that the houses on the lower-lying part of a street, where water tends to pool during heavy rainstorms, could receive vastly different quotes from those at the top of a modest hill, where puddles typically don’t form. Homeowners at both locations would receive more precise quotes.

Risk Rating 2.0: How NFIP Is Leading the Way

FEMA is redesigning its flood insurance products, thanks in part to micro-censusing breakthroughs. In October 2021, the NFIP plans to roll out Risk Rating 2.0, an all-new rating methodology.

While not many details about Risk Rating 2.0 are public, the update is expected to change NFIP policies in a few fundamental ways. 

First, micro-censusing capabilities are expected to introduce property-specific risk assessment capabilities, which will make way for flood insurance policies that are tailored to each household.

The new rating engine is also expected to help agents accurately price and sell policies. More rating clarity will help policyholders better understand their property’s flood risk and how that risk is captured in their cost of insurance.

Perhaps most importantly, NFIP’s rating characteristics under Risk Rating 2.0 include the cost to rebuild a home, which means that NFIP will aim to give more affordable quotes to owners of lower-value homes. In other words, the system will be able to provide fairer policies to all homeowners.

See also: Flood Insurance: Are the Storm Clouds Lifting?  

The Impact of Micro-Censusing on Private Insurance

In addition to changing the way the NFIP rates policies, micro-censusing technology is also drawing private insurers to enter the flood market. The new availability of data means they can now more confidently assess and underwrite risks around the country. 

The implications of this are significant: With private insurers entering the market, there’s sure to be an increase in available products, which means greater opportunity for Americans to protect their homes and greater opportunity for agents to grow their books and better serve their customers. 

Greater product availability will also put less strain on federal disaster funds. Today, 20% of all NFIP claims come from properties that aren’t in high-risk areas. Those properties receive a third of all federal disaster assistance for flooding, in part because they’re not required to carry flood insurance.

In other words, the impact of micro-censusing (and other technology) on flood insurance can’t really be overstated, especially in an era where FEMA’s official position is “anywhere it can rain, it can flood.”

See also: 5 FAQs on Private Flood Insurance  

Micro-Censusing Will Bring Macro Changes to America’s Flood Insurance

Today, the typical homeowner faces a 10% chance of fire loss over the course of a 30-year mortgage, but a 30% chance of flood loss. Still, 85% of homeowners have fire insurance and just 15% have flood insurance. These are clear indicators that flood insurance in America needs a makeover.

Micro-censusing has the power to spark dramatic change in the industry. The granular data it provides will lead to the entry of more private insurers and the improvement of NFIP policies, which will increase agents’ ability to find appropriate coverage for their customers. Overall, this will mean better flood protection for at-risk Americans.

5 FAQs on Private Flood Insurance

With headlines about catastrophic and historic storms driving increased interest in flood insurance, the emerging private flood insurance market – an alternative to coverage through the National Flood Insurance Program (NFIP) – is increasingly attractive to homeowners. As realtors guide their clients through the home buying process, here is some basic information that clients need to know about this new option:

Q: What is private flood insurance, and what does it cover?

A: Private flood insurance is a risk management tool backed by global capital markets that provides financial protection for buildings and personal property damaged by floods, helping families, communities and businesses to recover from these devastating events.

Q: What are the differences between an NFIP and private policy?

A: There are two primary differences between an NFIP and private policy: regulatory authority and source of capital.

The biggest misconception with private flood insurance is that the NFIP is regulated and that private isn’t. Private flood insurance is heavily regulated and falls under the jurisdiction of state insurance regulators – just like homeowners, hurricane and auto insurance. While these state-based insurance regulations are separate from the federal regime that regulates the NFIP, the level of consumer protection and oversight is comparable.

The second difference is who’s bearing the risk of loss. With an NFIP policy, FEMA holds all program risk, with U.S. taxpayers serving as the ultimate backstop. With private flood insurance, independent insurance companies bear the risk of loss. As a result, these companies cannot accept any risk in any location and must be more discerning with respect to underwriting, coverage and price. While private insurers cannot be all things to all people, this disciplined and thoughtful approach means these insurers can deliver a sustainable and valuable product to homeowners.

See also: Here Is How to Make Flood Insurance Work  

Q: How can a private policy work in tandem with an NFIP policy?

A: A private policy can act as either an alternative or a complement to an NFIP policy. Private policies equip agents with customizable options that can cater to individual homeowners’ needs, allowing insurance agents to craft solutions that ultimately protect more people from floods.

Private policies can also complement an NFIP policy. If you have a policy through the NFIP, you can purchase private insurance to increase the limits of your coverage. Private insurance is also available to expand coverage, such as adding protection for contents in a basement or the expense to clean out a swimming pool.

Q: Who qualifies for private flood insurance, and how does it work?

A: The NFIP is essentially a one-size-fits-all policy available to almost every person in all geographies. However, homeowners aren’t all the same. That’s the beauty of private insurance programs – they’re different programs offering different value propositions to different people, like high-net-worth homeowners or renters.

Q: What is/isn’t covered by a homeowner’s policy when it comes to a flood?

A: Generally speaking, most homeowners’ policies exclude flood losses completely. A homeowners’ policy may cover water damage from broken pipes or sump pumps, but most exclude loss from inundation, whether resulting from swollen rivers, storm surge or intense rainfall.

The flood insurance industry is rapidly changing, and there are new opportunities coming online every day. Every realtor should take time to understand these new options. In most situations, the home is the family’s most valuable investment. Wherever it rains, it can flood, so take time to consider solutions that can protect these treasured investments from catastrophe.

See also: Emerging Market for Flood Insurance  

This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisers before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions and exclusions for an insured.

Here Is How to Make Flood Insurance Work

The National Flood Insurance Program (NFIP) needs to change. It was $30 billion in debt last year (though Congress forgave $16 billion of that), its flood maps are woefully outdated and its incentives are out of whack – while the riskiest homes it insures make up just 2% of premiums, they account for 25% of claims.

In recent months, Congress has extended the program (and occasionally let it lapse) without making any meaningful reforms – a strategy that has proven woefully inadequate to the problems the NFIP faces. This month presents yet another deadline: Unless Congress renews the NFIP by tomorrow, it will lapse. This is a golden opportunity to modernize a program that is not adequate for the new realities of severe weather.

We’ve faced this opportunity before, and various stakeholders have offered solutions. One common chorus is to encourage private insurers to get in the game to fix the NFIP. I’d like to modify that proposal slightly: Privatize flood insurance, and make everyone get it.

If this sounds philosophically similar to what the Affordable Care Act tried to do for health insurance, that’s because it is. We all agree that health insurance premiums won’t come down if only sick people buy it. Encouraging everyone to buy health insurance makes sense because everyone – even the healthiest among us – faces risk. Anyone, after all, can get hit by a bus.

Today, the same is true of flooding. After last year’s hurricane season, FEMA’s official position became “anywhere it can rain, it can flood.” In other words: All of us could benefit from flood insurance.

See also: Emerging Market for Flood Insurance  

Of course, there are several major differences between the health and flood insurance landscapes.

First, while nutrition and medical research are improving our tools for staying healthy, our collective flood exposure is growing. There are three major culprits:

  1. Human nature. We like living near water, which means living in high-risk areas. As long as people will buy or rent homes near the water, developers will build them.
  2. The current regulatory environment provides incentives for development without providing incentives for management of flood risks – we saw the results of this all too clearly when Harvey hit Houston last year, and we saw it again this hurricane season with Florence and Michael.
  3. Extreme weather is the new normal. Four of the five most damaging (and expensive) hurricanes of all time have happened since 2012. The most expensive was in 2005. This is not a fluke.

The second important difference between flood insurance and health insurance is that the American people are already paying for flood insurance. The NFIP is a taxpayer-subsidized program, but only taxpayers with an active policy enjoy protection in the event of a flood. Privatized universal coverage would not greatly affect the number of people currently paying for flood insurance, but it would significantly increase the number of people who enjoy the benefits of coverage because payments would be tied to actual policies.

The third difference is that our current system for flood insurance encourages behavior by homeowners, developers and local leaders that works against everyone’s long-term interest. For example, the NFIP currently has updated flood maps for some communities that show an increased number of homes at risk for floods. But residents have, in some cases, successfully lobbied for delays in the effective date of those maps because, as soon as they become effective, home values will drop and residents will have to start buying flood insurance.

In other words, skewed incentives are pushing people to act against their best financial interest and against the interests of other taxpayers. Privately run flood insurers would mean no reelection pressures to falsify flood maps (which local politicians currently face), and homeowners for whom flood insurance is mandatory would have no incentive to avoid it.

See also: Future of Flood Insurance  

Beyond all this, though, privatization makes sense for other reasons. Private insurers would find ways to provide incentives for relocation rather than rebuilding in areas that flood repeatedly. They would prioritize the data analysis necessary to make flood maps that are both accurate and predictive. And they would likely lend their lobbying weight to reforming development and environmental regulations that contribute to our growing flood exposure.

This amounts to a significant change in how we think about flood insurance in the U.S., but our risk of flooding has changed significantly in recent years. Anything short of a drastic overhaul will mean the NFIP just ends up further underwater.

A Contrarian Looks ‘Back to the Future’

A recent week started with reading a page by Paul Carroll from his Innovator’s Edge platform. The title question was: “Will Apple enter insurance? Google? Microsoft? Amazon?” His opening statement was, “Apple’s market value crested $1 trillion last week, and its big tech brethren Google, Microsoft and Amazon aren’t far behind, all are valued north of $800 billion…”

I wasn’t shocked until he said, “All have extensive data about customers. And all have the size to tackle mind-bending problems that insurance faces – by contrast you’d have to combine AIG, Prudential and Allstate just to surpass $100 billion in market value…”

A day later, someone sent me Reagan Consulting’s “The Golden Age of Insurance Brokerage.” As I read through this short update, I could almost hear, “Happy days are here again” playing in the background for the brokers. The following captures the essence of this document: “We are living in the Golden Age of insurance brokerage. There are so many good things happening, it is hard to keep track of them all.” This was followed by six bullet points providing evidence of why the brokers are so happy. (No mention was made of insurance buyers, who may not be as HAPPY!)

A friend then sent me a link to “The Death of the Old School Agency,” by Michael Jans. This is a more in-depth view (30-plus pages) of the world as it may or will be.

From the executive summary, we learn that today’s agent faces a new world of:

  • Rapid changes in consumer behavior and expectations
  • Emerging, existing and well-funded competitive channels
  • A rising millennial generation with different expectations, both as consumers and workers
  • A pace of change unlike anything they’ve ever seen before.

Depending upon who, what and where you are, this report will bring good news or bad news, but nonetheless – it is news that (I believe) every agent needs to hear, consider, ponder and then decide on.

Agencies tomorrow are not “your daddy’s Oldsmobile.” Ask someone older than 40 to explain the phrase. This was the beginning of the end of a legendary line of General Motors automobiles and probably a foreshadowing of the collapse of General Motors.

I encourage you to study all three of these documents – they are well-written by very successful folks. Their ideas should be carefully considered, and, if properly adapted to your circumstances, all can improve your results. That is – as long as the world goes as “we the people” in this industry think it should. What follows is my contrarian view – less “raining on your parade” and more clearing the air as you look to the horizon in tomorrow’s consumer-driven economy. We are not in charge. We today are wagering on our individual and industry’s future. Place your bets. The market will pick the winners.

See also: 3 Myths That Inhibit Innovation (Part 3)  

This contrarian will offer his ideas by looking “back to the future.”

There will remain great opportunities in our future, but these will require transformational change. From today’s selling in an industry that is product-defined and product-driven, to a new client-defined and client-driven marketplace where we will facilitate our client’s buying – solving their problems and meeting their needs. In the competitive nature of tomorrow’s world – we’ll have to use artificial intelligence (AI) to anticipate these needs and deliver solutions before our clients “go shopping.”

Some of the people, gifts, expertise, disciplines, skills, etc. we’ll need will be much different than the mechanical process we use today. We will need communicators (verbal and nonverbal), empathizers, artists, inventors, designers, storytellers, caregivers, consolers, big picture thinkers, storytellers, caregivers and “techies.” This is not an all-inclusive list. (Consider reading “A Whole New Mind,” by Daniel Pink.)

Warren Bennis offered the following wisdom decades ago: “The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.”

Consider the following – brief observations from one man’s experience:

  • In 1978, Fireman’s Fund/Famex Agents offered a GM-endorsed insurance program for dealers. I was the SW Louisiana agent. In those days, the No. 1 concern of GM and its dealers was that GM would reach 65% market share and the federal government would break GM up into separate companies, Chevrolet, Pontiac, Buick, etc. GM’s arrogance, the dealers’ complacency, foreign competition, a poor product and a marketplace wanting change reshaped their world. GM never made it to 65% market share. I believe the insurance industry is ripe for a similar transformational experience.
  • In 1994, I was speaking to a bank in St. James Parish (Louisiana) about change. I said, “Today, GM, Sears and IBM are the kings of their respective jungles. I believe, in my lifetime, one of these companies will fail.” I was laughed off the stage. Fourteen years later, I was vindicated with the bankruptcy filing by GM. I personally believe that I’ll also prove right on Sears.
  • In June 2008, I was an instructor for attendees in a risk and insurance class at the KPMG Advisory University in Chicago. This was a continuing education week for KPMG consultants. A rookie consultant asked, “How does an insurance company fail?” I explained with the Champion Insurance story.

Then he asked for an example of a “rock solid” insurance company. I said, “AIG.” The KPMG senior partners in the room nodded in agreement. Less than 100 days later, AIG was functionally bankrupt, requiring a $182 billion bailout by the government. None of us saw that coming. (I’ll bet you were surprised, as well.)

As I wrap up this article, hoping I’ve stimulated a much more important discussion about the future, consider the following:

  1. Companies valued at $100 billion are “big” until measured against trillion-dollar operations in a world in transformation – especially if the giants have better technology and data!
  2. Apple, Google, Microsoft and Amazon (AGMA) are kings of their respective jungles. Yet these companies are not even as old as the majority of readers of this column (with the possible exception of Microsoft and Apple, founded in the mid-1970s). Why would we think that our “old and stoic” industry is “safe” and “promising” for tomorrow? Are we celebrating our past when we should be planning our future?
  3. Do you think that any of your clients who have recently received a rate increase will be as enthusiastic about the profitability of our industry and the future of the world of brokers as stated in the article offered by Reagan? I’ve rarely (if ever) heard a client celebrate the profitability of our industry when it is an expense to theirs…
  4. Generational changes, social media and our societal rethinking of issues of race, gender, ethnicity, family, values, economic models (socialism / capitalism), etc. may result in our going in directions that we, 10 years ago, would have never considered possible.
  5. Has our industry let the government get its nose into our tent/economic system. NFIP has been in this industry as long as I have. The private sector didn’t want to address the flood risk. Now, these nearly 50 years later, the flood program is a government program and not sustainable. Unfortunately, the government may be ready to have the camel stand up in the tent? Medicare for everyone is no longer a crazy idea. It may not work, but….
  6. If the insurance industry was being designed today to do what it does, do you really believe it would be what we have? If you answered yes, please reread the question!

See also: What Is Really Disrupting Insurance?  

Bookstores, travel agencies, video stores, etc. were important in our communities of yesterday – UNTIL THEY WEREN’T. Should we begin redesigning our own operations and industry and future before a competitive innovator does it for us?