Flood insurance outlook for 2022 & beyond
A look at flood devastation and attempts to repair a broken federal flood insurance system.
COVID-19 may have carried most of the headlines again in 2021 but flooding across America and issues related to flood insurance continued to make the news as well. While Hurricane Ida worked its way from the Gulf to the Northeastern seaboard in late August, Federal Emergency Management Administration (FEMA) was rushing to implement the National Flood Insurance Program’s (NFIP) Risk Rating 2.0 for an October 1st start date.
With climate change and the peril of flood growing in importance and the NFIP’s revised rating system now in place, what can agents and brokers expect in 2022 and beyond? More flooding and continuing unintended consequences flowing from an ill-conceived implementation of Risk Rating 2.0 by the NFIP.
Because the NFIP has chosen to implement Risk Rating 2.0 over a 10-year time frame rather than the original five-year span, NFIP rates will not reflect what the NFIP considers to be accurate flood insurance rates for a very long time. This, in turn, will mean that producers and their clients must negotiate a more dynamic flood insurance marketplace with private flood insurance steadily taking a more prominent position in the pursuit of the best value proposition for flood insurance buyers.
A look back at flooding in 2021
According to the National Oceanic and Atmospheric Administration, (NOAA), 2021 produced the third most active hurricane season on record and “the sixth consecutive above-normal Atlantic hurricane season.” The 21 named storms and four major hurricanes were often accompanied by torrential rains and extensive flooding.
Hurricane Ida was among the most costly hurricanes ever recorded with an estimated $16 to $24 billion in flood-related losses alone, according to CoreLogic. After touching ground in Louisiana on Aug. 29, Ida made its way to the Northeast dumping up to nine inches across Pennsylvania, New York, New Jersey and other surrounding states.
Though Ida was the year’s largest and most costly flooding event, Hurricane Henri, caused devastating flooding across the Northeast in mid-August. Soon after, an unrelated storm left more than 20 inches of rain in Tennessee in just one day.
With climate change and seemingly relentless storm activity as a backdrop, many lawmakers and taxpayers hoped that Risk Rating 2.0 would make serious headway against the decades-long negative outcomes caused by inadequate and unfairly calculated NFIP rates.
A closer look at Risk Rating 2.0
Originally the NFIP was created to foster a private flood insurance industry that would charge adequate and equitable rates. Some lauded Risk Rating 2.0 as the path back to that original vision, but sadly this is not the case. The unfortunate truth is that Risk Rating 2.0 as currently envisioned will continue to impede private market assumption of flood risk, burden taxpayers with billions of dollars in unfunded losses, encourage billions of dollars in ill-advised building construction, assure destruction of wildlife habitat and continue delivering taxpayer-funded subsidies to wealthy flood-exposed property owners.
Recognizing the more equitable outcomes achieved by the rating mechanisms pioneered by private market flood underwriters, FEMA developed Risk Rating 2.0 with the goal of rating flood risk on a more accurate basis. Though Risk Rating 2.0 is a noble effort at equity in flood insurance rates, the current plan of implementation will not yield meaningful results in a reasonable time frame.
For example, problems will stem from the fact that Risk Rating 2.0 continues to use old constructs that have proven counter-productive.
- The NFIP will continue to deny the return of any premium if a policyholder chooses to upgrade to more attractive pricing or coverage found in the private market except on the renewal date of the NFIP policy. This is a massive deterrent to private market growth and assures that taxpayers will fund more NFIP losses than necessary and that policyholders will be denied the benefits found in many private market policies such as additional living expense coverage and a broader definition of flood.
- No property owner will pay more than $12,125 regardless of their risk (a massive incentive for developers to build on flood-prone land for wealthy buyers).
- Repetitive loss properties will be rated as though they never had a loss, that is until another claim is submitted. Once a new claim is submitted, it will trigger the restoration of the structure’s claims history with a consequential premium increase. This outcome is hardly fair to a home buyer who likely will have no idea they would be subject to such an increase – not to mention that this provision provides an undeserved giveaway to owners of repetitive loss properties.
- The Community Discount Program will continue to have the effect of NFIP rates being unaligned with risk.
The outlook for agents and brokers
Since the initial rollout of Risk Rating 2.0, NFIP flood insurance rates have been unpredictable. In these early days, agents and brokers are seeing risks rated at one premium one day and then at a totally different premium a short time later.
With NFIP flood insurance rates dramatically fluctuating, agents and brokers will be wise to record each quote they receive from the NFIP. Doing so may help them to convince the NFIP to honor a lower quote if the price changes prior to purchase. Further, agents and brokers would be smart to supplement every NFIP flood insurance quote with a quote from the private flood insurance market. The private market rates should be more stable and in many cases priced lower. Finally, agents and brokers should be aware of the NFIP’s mid-term cancellation rule. Informed producers should talk to their policyholders at least 30 days prior to renewal, make sure they understand their options relative to a private flood insurance alternative and inform any mortgagee responsible for paying the flood insurance premium of their move to the private market. This should all be completed by the renewal date of the policy if at all possible.
In summary, many policyholders will see new rates in 2022. For agents and brokers that creates opportunity. As the NFIP continues to implement these rate changes through Risk Rating 2.0, agents and brokers should understand their policyholders’ options and convey that information clearly. Further, if they want to increase consumer choice and make the job of getting the best value for their clients easier and fairer, they should consider contacting their member of Congress and encouraging them to mandate a return of premium from the NFIP when a mid-term change in carriers is desired.
With six consecutive above-normal storm seasons behind us, it would only be wise to prepare for the worst in 2022. Agents who understand how to best serve their clients’ needs with flood insurance options from both the NFIP and the private flood insurance market will come out on top.
Craig Poulton (cpoulton@poulton.com) is chief executive officer of Salt Lake City-based Poulton Associates, LLC, which administers various catastrophe-related insurance products, including the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATCoverage.com.
Opinions expressed here are the author’s own.
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