PIA recently joined the National Flood Association (NFA), and, late last month, Lauren Pachman, PIA’s Counsel & Director of Regulatory Affairs, represented PIA at the NFA’s annual conference in Scottsdale, Arizona. The event assembled experts across all aspects of flood insurance for a two-and-a-half-day conference, where attendees learned not only from the specialists lined up to address the participants formally but from all those in attendance.
Attendees ranged from floodplain managers in midsized cities and counties, to principals at CoreLogic, to the administrator of the National Flood Insurance Program (NFIP) himself, David Maurstad, among many others. Indeed, the entire Federal Insurance and Mitigation Administration (FIMA), which houses the NFIP within FEMA, was well represented.
PIA participated in two panel discussions during the conference. The first addressed legislative and regulatory updates, which included an overview of notable state legislative proposals on flood, an update on the perpetual stalemate in Congress over the future of the NFIP, and prospects in the next Congress for long-term reauthorization and substantive reforms to the NFIP.
The second panel discussion was on Risk Rating (RR) 2.0 and included representatives from lenders, vendors, realtors, and independent agents. Panelists engaged in a spirited discussion about the limitations of RR 2.0, the need for transparency in the rating engine, and the value of RR 2.0 in ensuring the NFIP’s solvency over the long term.
The panelists’ most lively discussion came around the relative transparency and value of the spreadsheets and other data sources available on the FEMA website. While all the panelists lauded FEMA for making that information available, PIA observed that the material purporting to explain the rating methodology does not do so effectively for independent agents or the public. Unfortunately, in the context of RR 2.0, some independent agents struggle to explain rate changes to their clients. Independent agents pride themselves on their customer service, and they shouldn’t need a degree in statistics to explain rate changes to customers in an understandable way.
Agents who have attended FEMA’s RR 2.0 training sessions know that the new methodology includes many new rating factors that were not part of the legacy methodology. But how those factors are weighed relative to one another remains a mystery. When asked by a policyholder or prospective policyholder why their RR 2.0 rate is higher than anticipated, independent agents may find themselves struggling to identify the rating factors contributing to the changes. Before RR 2.0 went into effect, many homeowners made mitigation expenditures with the understanding that they would recover their costs via reduced premiums over the time they own their homes and are dismayed to learn now that may no longer be the case. Agents must be able to articulate the reasoning behind changes that leave homeowners having spent money on improvements they thought would pay for themselves. FEMA’s available data simply does not provide the insight agents need.
Much of the NFA conference was spent brainstorming ways to improve the NFIP, and several popular sentiments emerged:
- Creation of an affordability framework. Congress needs to pass an NFIP reform bill that would make the program affordable for policyholders who will never be able to afford their property’s full risk rate. Flood-prone southern states in particular are replete with policyholders who will be priced out of their homes even before their rates reach full risk.
This idea is not new; in 2014, with the passage of the Homeowner Flood Insurance Affordability Act (HFIAA), Congress asked FEMA to create an affordability framework. In 2018, FEMA did so. Responsibility now falls to Congress to use FEMA’s input as a starting point to pass some type of means testing that will protect low-income policyholders from being forced from their homes.
- Creation of a rate/risk tool/calculator. The Association of State Floodplain Managers (ASFPM) has called for this, and the PIA-endorsed Flood Insurance Pricing Transparency Act, a bipartisan bill sponsored by Sen. Bill Cassidy (R-LA), includes a provision for something similar. Realtors, floodplain managers, consumers, and other stakeholders would benefit from the existence of a tool to help them assess the value of undertaking a certain mitigation strategy, for example, and none of them have access to the current rating engine.
PIA supports this concept while continuing to urge policymakers and regulators to be wary of implicitly or explicitly permitting unlicensed individuals to act as insurance agents. For that reason, PIA opposes the idea of FEMA simply providing rating engine access to unlicensed stakeholders. FEMA alone has the capacity to create a public-facing calculator or tool that would provide stakeholders with valuable information without violating state insurance licensing regulations.
- Revisions to the application of the mandatory purchase requirement. Existing flood maps and flood zones are still in use for the purpose of assessing whether a property is subject to the mandatory purchase requirement, even though RR 2.0 is expected to result in much more accurate assessments of relative levels of flood risk. It would make sense for the mandatory purchase requirement to be recalibrated so that a property’s risk as valued in RR 2.0 matches its status in the mandatory purchase space.
In other words, currently, because existing flood maps and flood zones determine which properties are subject to mandatory purchase, some properties whose full risk rates will be extremely high (because those properties are at high risk of flooding) will not be required to carry flood insurance because they remain outside a mandatory purchase flood zone. Conversely, some properties whose full risk rates plummet under RR 2.0 will still be required to carry flood insurance because they remain in a mandatory purchase zone, even though RR 2.0 has concluded their risk was previously overestimated.
At some point, this discrepancy is expected to be addressed, but it is not expected to happen in the next couple of years.
- Increase in the $250K residential building coverage limit. The residential building coverage limit is a creation of Congress, which places responsibility for updating it with Congress. The $250,000 limit has been in place for decades, and an update is long overdue.
IMPORTANT NOTE ON STATUTORY CAPS:
While existing NFIP policyholders are entitled to have their annual premium increases capped at statutory limits (typically either 18 or 25 percent year to year), several situations will cause premiums to increase in ways that are not subject to statutory caps. Statutory caps apply only to increases in premium prompted by a consumer’s movement along the glide path toward their risk-based rate. If there are any changes in premium prompted by anything other than movement along the glide path, such changes are not subject to statutory caps. Examples may include:
- Loss of an applicable discount. This will result in a premium increase that is not subject to the statutory caps. In other words, if a policyholder had a discount and loses it, the increase in their rate resulting from the lost discount will not be subject to the statutory cap.
- Change in policy. If a policyholder increases their coverage amount or lowers their deductible, that change will result in a premium increase, and that increase will not be subject to statutory capping.
This issue is addressed in the Flood Insurance Manual’s “How to Endorse” section; exceptions are described as “premium-bearing changes.”
NEW AGENT TRAINING DATES FOR APRIL:
Finally, new agent training dates have been released for April; these sessions will be specifically geared toward agents focusing on Phase II (renewals that became eligible for RR 2.0 on April 1, 2022).
RISK RATING 2.0: EQUITY IN ACTION | PHASE II – RENEWALS
SAVE THE DATE FOR UPCOMING SESSIONS: May 4, 11, 19, and 26.
Please Note: These webinars are NOT approved for continuing education credit in any state.
Beginning April 1, 2022, all policies will be priced under Risk Rating 2.0: Equity in Action at their next renewal.
Attend this webinar to learn about:
– Necessary rating variables for renewal policies
– Mitigation discounts available to a policyholder
– Annual increase cap discount
– Provisional rates
– Changes to the lapse in coverage rule
Suggested pre-requisite: Key Fundamentals of Flood Insurance for Agents 2.0. To receive agent training course offerings, please sign up here.
To register, please use the links above. These webinars are FREE to attend, but spaces are limited so please register early.
Please Note: This course does not meet the training requirement listed in the Federal Register notice on training and education requirements related to the Flood Insurance Reform Act of 2004, otherwise known as FIRA 2004.
If you can’t attend these sessions, the NFIP will continue to announce additional dates for these webinars over the next month or so. If you are not already signed up, you may sign up here for NFIP Agent Training Bulletins.