A Q&A with CoreLogic® Flood Expert Scott Giberson

Before wading into the business of insuring flood, it’s imperative property insurers have a solid understanding of federal flood legislation and coverage limits surrounding the National Flood Insurance Program.

The National Flood Insurance Program (NFIP) is a program established by the U.S. Congress in 1968. The NFIP has two primary purposes: to share the risk of flood losses through flood insurance and to reduce flood damages through floodplain management.

Q: What flood insurance products does the NFIP offer?

A: There are two types of policies—Standard Flood Insurance Policy and Preferred Risk Policy—and three Standard Flood Insurance Policy forms—the Dwelling form, the General Property form and the Residential Condominium Building Association Form. The Dwelling form is used for single-family homes and up to 4-unit multi-family, with insurance limits of (up to) $250,000 for the building and (up to) $100,000 for contents of the building. The General Property form is used for commercial properties and includes limits up to $500,000 for the structure and $500,000 for the contents. The Preferred Risk Policy is a lower-cost policy with certain property eligibility requirements, including that the property is located in a non-SFHA flood zone according to the current flood map.

Being a federal insurance product, the NFIP policy includes several exclusions and limitations that one may not find in a homeowner’s policy issued by a private carrier. For residential properties, NFIP limitations include the $250,000 coverage limit, the exclusion for most coverage in basements, and the lack of additional living expense coverage, among others.

Q: How does the NFIP determine flood insurance rates?

A: Generally speaking, rating tables within the NFIP are divided into (i) properties in the SFHA, and (ii) properties not in the SFHA. For properties in the SFHA, the rating includes factors such as the specific flood zone, whether pre-FIRM or post-FIRM, and the elevation of the home relative to the level of the 1% annual chance floodplain. One criticism of the NFIP’s rating structure is that in some cases there can be a significant premium difference between two properties which are otherwise similar in risk profile but are on either side of the SFHA line on the flood map. Because a home’s elevation is needed to properly rate a policy on a post-FIRM property in the SFHA, these property owners often face the cost of acquiring an Elevation Certificate as part of purchasing an NFIP policy.

Though it remains controversial with some in Congress, over the past several years, the NFIP has been moving towards a more structure-specific, more actuarially sound, rating system described as Risk Rating 2.0. Scheduled for deployment in October 2021, Risk Rating 2.0 is supposed to improve both the coarseness of the rating and reduce some of the upfront challenges to obtaining a policy under the current NFIP program.

Q: Can lenders accept a flood insurance policy from a private insurer?

A: NFIP policies can be issued directly from the NFIP or through the network of more than 60 insurance companies which have partnered with the NFIP to sell and service NFIP policies (“Write Your Own Companies”). Whether purchased from the NFIP directly or from a Write Your Own Company, the NFIP policy is the same. On the other hand, private insurers can sell a non-NFIP private flood insurance policy which is different from the NFIP policy.

For decades federally regulated lending institutions have received and reviewed NFIP flood insurance policies (whether direct or via a Write Your Own Company) as satisfaction of the mandatory purchase of flood insurance requirement. Knowing the constant terms and conditions of this federal policy, and how the policy would respond at the time of a flood loss, the lender’s only obligation was to verify the identity of the insured (aka “the borrower”), the insured property (aka “the collateral”), the policy term, the flood zone used for rating, the deductible, and the amount of coverage (which is often up to the maximum of $250,000 under the NFIP).

This changed on July 1 last year when the Federal banking regulators implemented new federal flood insurance regulations governing a lender’s acceptance of a private flood insurance policy to meet the mandatory purchase of flood insurance requirement. Thus, yes, lending institutions can accept private flood insurance policies, however, there is additional work required of the lender to determine that the flood insurance policy is acceptable. In response, private insurers may have additional considerations for policy products, such as whether to include the compliance aid statement on the policy form and whether or not to meet the terms and conditions stipulated in the banking regulations under the mandatory acceptance criteria for policies.

Q: In addition to the updated banking regulations around private flood insurance acceptance, what makes private flood insurance products more viable for private insurers today than in the past?

A: There are several factors present today which make flood insurance more viable for private insurers within the U.S. residential market. Based on availability of greater data and technology leading to more sophisticated modeling, we now understand the gradients of flood risk both inside and outside the SFHA. With greater confidence in the models, more insurers are accepting the risk of flood losses in exchange for flood insurance premiums. In addition to the changes to the federal banking regulations, state legislators and regulators are looking at laws and regulations to open the regulated market to these products. As markets open, private insurers may be able to offer a more diverse and comprehensive suite of flood insurance products to consumers.

Download the interactive report, Finding Opportunities in Insuring Flood, which explores federal flood legislation, coverage limits and two case studies identifying potential underinsurance areas.