The US House of Representatives recently passed a bill that, if signed into law, could help homeowners save money on flood insurance.
The bill, known as the Flood Insurance Market Parity and Modernization Act, clarifies that mortgage lenders can accept this coverage from private insurers.
Specifically, it reminds these lenders to treat private insurance like federal insurance when working with homeowners whose mortgages require flood coverage. (Properties located in a flood zone and backed by a federal loan usually need it.)
Although this has been the case for decades, private insurance companies have long shied away from selling this type of plan. One reason for that is the catastrophic nature of flooding. Another is coming up with rates that properly reflect the risk tied to flood-prone areas and properties isn’t easy.
As a result, most American homeowners and renters buy this kind of coverage from the National Flood Insurance Program (NFIP). HR 2901, as the bill mentioned above is also known, could change that by enticing private insurers back into the market.
What’s in it for Insurers?
Why would private insurance companies want to start selling flood insurance again? For starters, HR 2901, if it becomes law, would make private flood coverage more appealing to consumers than it may have been in the past.
For example, a lot of renters and homeowners ignore private insurance because they assume it won’t meet the mortgage lending requirement mentioned earlier. (Mortgage lenders have ignored it for the same reason, by the way.) Also, many avoid it due to the uncertainty that often surrounds what would happen if a private insurer canceled their policies.
HR 2901 addresses both of those concerns. In the case of the second, it does so by making it clear the Federal Emergency Management Agency (FEMA) won’t penalize people for taking a chance on non-NFIP flood coverage. So, if someone drops their NFIP plan in favor of a private one, only to return to the NFIP at a later date, FEMA will give them a rate that’s the same as if they’d had continuous coverage.
HR 2901 Support
For that reason and many others, HR 2901 has attracted a lot of supporters so far. Hundreds, in fact. Its House vote was 419-0. Also, a number of industry groups and organizations applauded the bill’s passing. Among them:
- American Insurance Association
- Independent Insurance Agents and Brokers of America
- Insurance Information Institute
- National Association of Professional Insurance Agents
- National Association of Professional Surplus Lines Offices
- Property Casualty Insurers Association
A slew of state insurance commissioners have thrown their support behind the measure too. Pennsylvania’s Teresa Miller is one of them.
Miller testified in favor of HR 2901 before the House Subcommittee on Housing and Insurance in February. At that time, she told legislators she has “heard stories of consumers getting substantial savings from private flood insurance as opposed to the NFIP product.”
In one case, she added, “a consumer’s annual premium under NFIP was $7,500, but a private plan offered similar coverage for $1,415. In another instance, the federal NFIP premium was $6,000, while private insurance was just $900.”
Why HR 2901 Could Be Good for Consumers
“Every homeowners’ situation will be different,” Miller admits. In general, though, she says that “competition typically produces lower costs for consumers. And we believe that is and will continue to be the case as more private and surplus lines insurers enter the flood market.”
Also sure to help homeowners and renters in this situation: the subsidies that have long made NFIP policies as affordable as possible are on their way out. In other words, Miller says, “many homeowners are facing several years of rate increases from NFIP.” That will make private coverage more competitive as well.
And then there’s the fact that “NFIP will remain the insurer to cover the higher risk properties,” she adds. “Private insurers are not going to cover the higher risk properties when it comes to flood insurance, so they are less likely to have huge losses such as NFIP did with Katrina and Sandy.”
That’s not to say insurance companies that throw their hats into the ring won’t hit any roadblocks along the way. “Of course [they] will have losses,” Miller says. “But with many homes being re-mapped into flood zones which have never experienced flooding … private companies should be able to spread their risk sufficiently to cover incurred losses, as they do in all their business.”
Not Everyone is a Fan of HR 2901
Granted, not everyone has as much belief in HR 2901 as Miller. Take, for instance, the Property Casualty Insurers Association of America. Although Don Griffin, vice president of personal lines, recently said, “there's a lot of speculation that the industry might be able to better price this product,” he later added, "for those that are in harm's way … the private alternative will not likely be less expensive."
The Consumer Federation of America has even less faith in the bill. In a statement released before its House vote, J. Robert Hunter, the organization’s director of insurance, criticized the legislation and said it “would put both consumers and taxpayers at risk.” In particular, he took issue with the following:
The bill removes the NFIP’s 45-day notice of termination. This would be bad for homeowners and renters, as private insurers could cancel policies at will. Worse yet, they could cancel them as a storm approaches an area where a lot of customers live to avoid claims. Those customers then would be unable to secure an NFIP policy in time to be protected from the storm because of the program’s 30-day waiting period for coverage.
The legislation would allow surplus lines insurers into this market. Why would that matter? Hunter points out that “these insurers are not regulated by the states in any meaningful way.” Consumers with auto or homeowner complaints can contact their state insurance department for help, he adds. Those who buy flood insurance through a surplus lines insurer, though, wouldn’t have that option. Also, if one of these surplus lines insurer went bankrupt, its policyholders couldn’t access their state’s guarantee fund, which pays claims in these situations.
Want to learn more about flood insurance? Read our article, “What You Need to Know About Flood Insurance.”