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A New Dawn is Coming for NFIP

To all of us who worked so hard and successfully to secure a relatively speedy reauthorization for the federal flood insurance program when Congress...
June 10, 2003

By Patricia A. Borowski, CPIW, CAE
Senior Vice President
PIA National

To all of us who worked so hard and successfully to secure a relatively speedy reauthorization for the federal flood insurance program when Congress convened this past January - don't put your flood advocacy kit away just yet.  The federally backed National Flood Insurance Program (NFIP) that we have come to know, need - and at times, struggle with - may be in for the most extensive overhaul since its inception in 1968.

PIA and NFIP

The National Flood Insurance Program was signed into federal law in 1968. It was the idea and effort of PIA (then the National Association of Mutual Insurance Agents).  When no one else did, PIA members recognized the countrywide need for this coverage for their personal and commercial lines clients.

As we believed in the 1960's, PIA is fully committed and will work to support a fully functional, responsive, successful NFIP that operates as much possible as a true insurance program, but also take account for managing the federal benefits aspects of NFIP for certain community/property circumstances on a limited and validly vetted basis.

Opportunity Laced with Trepidation

The good news about the impending reform of NFIP is that it presents insurance folk (producers and carriers alike) with the greatest opportunity we've had in decades to correct and further improve the program for the benefit of our clients, communities and the federal government.  It may also present more opportunity to better coordinate/integrate the improved NFIP needs/functions with successful Congressional action on a federal natural disaster bill.  An increasing number of people both outside and in government are coming to recognize the value and importance of not only the NFIP, but also the insurance processes that surround it. 

However, the bad news - or let's just call it "the challenge" - is that in any reform effort at the federal level, the potential exists for reforms to be enacted that make any program worse, not better.

Some of the forces that will have a voice in NFIP reform efforts have many different and conflicting reasons for their sudden interest and activism.  It is a very mixed bag.  At worst and hopefully in the minority, some see their chance to kill NFIP and go back to a straight federal disaster loan program.  However, while not to that extreme, there are too many well-meaning interested parties that see NFIP transformed in a number of ways that would make any insurance professional shiver.

The Major Forces

The December and January efforts in Congress to rapidly move NFIP reauthorization once again awakened a number of Congressional critics and opportunists.  From among Members of Congress elected from states and jurisdictions that have had their fair share of flood experiences, comes the lengthy list of constituents' complaints about how NFIP did not serve their interests when "the big one hit" -- as well as their many suggestions of how NFIP should be improved.  An increasing number of these "voters" happen to be state and municipal representatives themselves. 

Also taking a more active part are the real estate, lender and property owners/builders groups.  The goal put simply is to be sure that "communities" can build, sell homes and make loans.  Joining forces with these interests for reauthorization efforts was great and we've carried this over to joint efforts on seeing that NFIP has the money and successfully completes and facilitates updated, accurate and user-friendly mapping services that include accessible archives of all previous maps.

Into this mix are added the expert suggestions of the NFIP federal staff. They are now adding to their once singular focus on NFIP their new role of integrating into the new U.S. Department of Homeland Security. They have played an active role in outlining the scope and issues that the internal NFIP audit and study (directed by Congress) will take.

Last, but not least, are we in the insurance sector.  We're the people charged with determining the business to write, at the correct underwriting standards and price, hoping we're able to accurately advise how the coverage will respond in claims situations. We also must inform and disclose any potential changes in underwriting, pricing and coverages that may affect renewals, and assure that renewals will be retained.  As a long time NFIP observer those tasks are routinely more difficult than day-to-day real insurance transactions.

NFIP Audit/Study is it friend or foe?

Congress has directed a comprehensive audit/study of the NFIP to evaluate how the programming is fairing. The prime categories of review can be summed up in several simple questions.

  • Is the NFIP meeting its federal charges and goals?
  • If so, how well is the NFIP doing this?
  • If not, why is NFIP not meeting these and which ones?
  • Should the NFIP continue, and if so, what changes may be necessary?

While the review is being developed as a targeted one, it has the potential to be a vehicle to open for examination NFIP completely.

PIA is working hard to assure that the audit looks rationally and fairly at both the successes and shortcomings of the NFIP.  What needs to be clearly understood is that while organized as an "insurance program," and while the federal government along with the participating insurance sector strive to manage it as such - NFIP at its heart is a federal benefit program.

As such, it has been subject to "raids" of its reserved premium accounts when Congress believed it was "over-reserved" afterwards followed by Congress' getting upset when claims are running well ahead of the reserve. It can be used as a federal benefit subsidy when large flooding events occur and insureds who are constituents don't believe they got a fair claims shake and their Member of Congress "fixes" it for them. 

And last, all suggestions for improvement really need to be worked through with many parties to assure that the final recommendation achieves the goal, without placing any one particular interest in an inordinate legal complication.  A processing currently needing more attention and application in NFIP.

The agenda from the insurance perspective

PIA agrees that many of the expressed concerns about NFIP are on target. 

For example, what should Congress do for municipalities that have a significant number of owned occupied dwellings and buildings that predate the NFIP, and are well established in what are now rezoned flood plains -- including substantial portions of municipal land intended for future sale as a source of town revenue? 

On the one hand, these communities cannot afford to bear the full cost of their true exposure rating, and so Congress should not subject them to the full weight of regular and usual rate and underwriting treatments of the NFIP. On the other hand, Congress cannot pretend that NFIP can and should accommodate low-cost prices with full value recovery of these exposures in NFIP -- while at the same time be confused or upset when the NFIP-paid claims exceed established NFIP premium reserves. Also, in addition to clear policy language, the insurable value limits must be reviewed and updated to reflect current property values and realties.

Looking at it from the insurance folks' perspective, the major categories of improvements that we need in the program are:

  • Better coordination, clarity of the meaning and claims response anticipated for NFIP flood policy language/coverage in commercial, primary-residence, secondary-residence, multi-family, condos and public buildings. A good example would be making available to carriers and, most particularly agents, the NFIP Claims Adjusters Handbook.  This is only a step in the right direction, long time in coming, and still not complete.
  • Better understanding and coordination of joint/connected efforts among the several parties involved with NFIP exposures, so that the underwriting and rate process is less confusing, more timely, streamlined and accurate. Examples of a "key rubs" here would be the breakdown that can occur in the Elevation Certificate process. Another is the occasional conflict between the lender's and the insurer's flood zone determination.
  • Better cooperation and understanding among the various interested parties at the local level to keep municipalities fully compliant in the terms of flood plain management and flood prevention as it relates to land development projects.
  • Better appreciation and management by the federal government of the real cost reimbursement and legal exposure issues of insurers and producers in this program. There has been a lengthy ongoing discussion regarding these issues in the still to be completed WYO agreement that expired in 2000.

What this Means to PIA members

PIA believes that there is a great need for PIA organizations with our members to "step-up" our activism in information gathering, communication, education, insurance writings, problem identification and community outreach efforts that we have long endeavored. 

Helping our members and their communities understand the compliance issues as they relate to flood plain management issues, practices and zoning are critical.  For example, today landowners may request and be granted an exception from a prohibition in flood plains. They can be permitted to "fill" to above flood grade. While this sounds like a great solution to vacant land previously intended for sale and development for a broader municipal tax-base - the practice is causing problems.  While flood plain management sets the level that must be achieved, they many times can only recommend the manner of fill and technique.  The landowner only needs to meet municipal codes regarding "fill."  The problem is that in many communities these standards only address sanitation issues, not flood/building structure worthiness issues.

What's a PIA member to do?

Take advantage of all the educational/information opportunities provided to you by the insurance carrier through which you write flood, the online NFIP materials and educational programs, and your PIA. While federal flood insurance has become a great deal less complicated than in the past, it is still materially different and "quirkier" as compared to regular property insurance.

Particularly in states where flood insurance is big business (coastal and repeat flood plain areas), PIA supports some certain number hours of state insurance CE requirements being devoted to flood and at least two questions on the P&C licensing exam should address flood insurance.

Reach out with quality educational materials on the NFIP to your customers and more broadly in your community.  We've heard some municipal authorities say that they have never been approached to have their buildings insured against flood.  Not that PIA fully swallows that, but with your increased local efforts and sharing that with us, we can help separate accuracy from misunderstanding.

Be sure you work with other insurance people in your area that write flood so that together you can have an open communication with your area's property owners, builders, realtors, lenders, municipal authorities, state flood plain mangers, and civil engineers responsible for elevation certificates.

And last, but not least and as always, please share your points of confusion, frustration, suggestion, success stories and the like with any and all aspects of writing federal flood insurance with your carriers and with PIA. We are here to collect those concerns, get answers and use them to push for program improvements.

June 2003

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