NFIP rates fell when they should have been growing
Rate inadequacy has plagued the NFIP and Risk Rating 2.0 isn’t projected to change that in the near term.
From 2014-2019, rates for the National Flood Insurance Program (NFIP) declined 9%, falling well below the 5% annual increases mandated by Congress, according to a review of NFIP data by Poulton Associates, LLC and HazardHub.
Community discounts were a major propeller of the rate decline, among other factors.
“Whenever Congress would say to raise rates, the bar for community discounts would be lowered. Around 70% of homes in the program are within community discount rating sites,” Craig Poulton, CEO of Poulton Associates, says. “That’s what we saw, rates should have been going up but premium was going down. The data doesn’t lie. The community discounts got more generous and that effectively defeated any rate increase.”
NFIP rates did increase during 2020 and 2021, but again below the mandated 5%, according to the report. As a result, the rates that were collected during the past decade were almost half of what was needed to cover the claims costs during the period.
Unable to cover its losses, the NFIP routinely borrows from the U.S. Treasury, and later receives debt forgiveness, resulting in a cumulative taxpayer cost of nearly $38 billion, according to the report.
Had NFIP rates grown at the mandated level during the past decade, the program would have been able to slice its deficit and achieve an actuarially sound rate. If that would have been the case, the private market would be able to “effectively depopulate the NFIP more rapidly,” Poulton tells PropertyCasualty360.com.
According to the Insurance Information Institute, in addition to improving competition, in turn giving consumers more competitive rates, the private flood market also helps spread the economic risks associated with flooding.
“The NFIP would be serving now, to a great extent, as the ‘insurer of last resort.’ We’d be in a very different place right, and the private flood market would have taken much of the burden off of taxpayers,” Poulton says.
Further, artificially suppressed flood rates incentivize “bad behaviors,” according to Poulton, who gives building near water as an example.
“In every special flood hazard area, there are numerous 50-year flood zones and 10-year flood zones, but you can buy rates that assume a 100-year flood risk. These become repetitive loss properties,” Poulton explains. Repetitive loss structures account for around 3%-4% of the NFIP’s population, but generate close to 30% of its losses.
While nothing prevents it, the NFIP refuses to release location data on repetitive loss structures, according to Poulton.
“If the NFIP would release those addresses of those properties, we’d see that most of them are wealthy people,” he says. “They say they are balancing affordability with sustainability, but there is no effort toward sustainability. The taxpayer is being asked to subsidize those that live by the water.”
Risk Rating 2.0
Although Risk Rating 2.0 was designed to improve the NFIP’s shortcomings, a review of the data showed it will not come close to achieving solvency in the near term. After five years, Risk Rating 2.0 is projected to result in an actuarially defensible rate for only about half of its policyholders, according to the review by Poulton Associates.
To further improve the flood insurance program, the report recommends the following four reforms during the NFIP’s reauthorization:
- Make the existing NFIP maximum rate increases as already prescribed by Congress mandatory.
- Drop the mid-term cancellation rule that denies policyholders the ability to cancel an NFIP policy for a private market policy at the time of their choosing.
- Require the NFIP to improve flood maps to encompass all affected geography which will discourage people from moving into flood-prone areas and facilitate more accurate risk rating methods.
- Mandate that the NFIP release property-level loss data to help buyers make informed decisions and help insurers correctly rate flood risk.
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