The devastation caused by Hurricane Harvey and Hurricane Irma has turned the nation's eyes and ears toward flood insurance. Though the catastrophic damage caused by the record flooding in Houston is tragic, the timing is ripe as Congress must address reauthorization of the National Flood Insurance Program (NFIP) in one way or another by Sept. 30.
Unfortunately, before Harvey, the reauthorization had fallen victim to political arm wrestling and permanently reauthorizing the program by the deadline seemed unlikely. A failure to reauthorize the NFIP could create a lapse in the program. In that case, homeowners, home buyers, realtors, lenders and insurance producers selling policies through the NFIP would have to rely solely on a much-abused private market for primary flood insurance coverage. Hopefully, Harvey's wrath, as well as Irma's only two weeks later, has left an indelible impression on lawmakers — leaving them poised to make meaningful reforms that will encourage private market competition for flood risk.
Although a lapse in the reauthorization of the NFIP may have some benefits for the private primary flood insurance market in the short term, it will be far more beneficial for taxpayers and NFIP policyholders if Congress simply corrects flawed language found in prior legislation, and instructs the NFIP to stop impeding the private market with its anti-consumer cancellation practices in an on-time reauthorization.
Strangely, it's the desire on the part of federal lending regulators to make themselves insurance regulators. That currently represents the greatest threat to the private flood insurance market and possibly the broader insurance market as well.
|A slippery slope
The flawed language of prior legislation has caused federal lending regulators to assume that they have the duty to regulate what mortgage lenders accept from homebuyers in lieu of an NFIP flood insurance policy. Once they establish themselves as flood insurance regulators, can it be long before they assert their right to vet all other types of property insurance before the insurance can be accepted by a mortgage lender? After all, doesn't the insurance accepted by a bank affect its "safety and soundness"?
Contemplate that state of affairs for a few moments. Replace informed state regulators with uninformed lending regulators to approve and disapprove policy forms and even pricing. Might this be the beginning of the end of state insurance regulation? This is not as remote a possibility as you might initially suppose.
Without immediate passage of flood reform, federal lending regulators intend to move ahead with a final rule, which ignores the provisions found in the McCarran-Ferguson Act. This law exempts most insurance from federal regulation. If lending regulators can ignore the provisions of McCarran-Ferguson without challenge relative to flood insurance, there is literally nothing to stop them from continuing their regulatory encroachment into insurance regulation tethered to all types of lending.
In late August, federal lending regulators noted in the Federal Register their intent in the coming months to issue the final rule related to a 2016 proposed rule, "Loans in Areas Having Special Flood Hazards–Private Flood Insurance." If the final rule is like the proposed rule, it will require lenders to accept only policies that will meet a federal bank examiner's interpretation of acceptability or face severe penalties. In other words, a federal bank examiner will be the frontline insurance regulator.
State insurance regulation is the backbone of America's thriving insurance industry. Any federal implementation of their final rule will ignore existing legal precedents that require very specific authorization by Congress before any federal regulator may undertake the regulation of insurance. If implemented, this would devastate the private flood insurance market.
Related: Business continuity plans & technology help businesses weather Hurricane Harvey
|Leave the regulation of insurance to those who know insurance
|The regulation of flood insurance, or any insurance for that matter, cannot be left to federal lending regulators, who specialize in regulating banking and know virtually nothing about effective insurance regulation. It should instead fall under the authority of our fully capable state insurance departments.
Legislation introduced by Sen. Dean Heller (R-Nev.) and Sen. Jonathan Tester (D-Mont.) will ensure this. The Private Flood Insurance Market Development Act (S. 1679) and its companion bill (H.R. 1422), introduced by Rep. Dennis Ross (R-Fla.) and Rep. Kathy Castor (D-Fla.) in the House of Representatives would revise the definition of private flood insurance laid out in the Biggert-Waters Act and clarify that the regulation of flood insurance falls under the jurisdiction of state insurance commissioners. The legislation would create a more level playing field for private insurers relative to the NFIP, which will allow agents and brokers at least some opportunity to offer customers flood policies that are often better priced and more comprehensive in coverage than the NFIP, as well as superior in terms of customer and claims service.
As an industry, we have ignored the potentially far-reaching consequences of this little publicized regulatory land grab. It is critical that state regulators, carriers and brokers not only pay attention to the proceedings of Congress and federal lending regulators in the coming weeks, but that they take action as well.
The insurance community has an obligation to all of our stakeholders to aggressively encourage lawmakers to keep the flood insurance marketplace free of even well-intended federal regulatory encroachment. Write to your congressmen with two clear messages: leave insurance regulation to the state regulators, replace the flawed definition of private flood insurance found in Biggert-Waters and give Americans a flood insurance marketplace, not a flood insurance monopoly.
Craig Poulton is chief executive officer of Salt Lake City-based Poulton Associates, which administers the country's largest private flood insurance program, the Natural Catastrophe Insurance Program at CATcoverage.com. Follow us on Twitter @nciptweets.
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