National flood insurance: Updated agent primer

Program gets one-year extension to September 30, 2011

By Lori Widmer

What is 42 years old, inconsistent, and nearly $20 billion in debt? The National Flood Insurance Program (NFIP), which after countless lapses and reinstatements, recently received one more extension, this time for a full year to September 30, 2011. It's been a rocky road.

On July 1, 2010, the NFIP was once more reauthorized by Congress after having lapsed for 30 days. That marked the third time in 2010 the NFIP lapsed. It was the third time Congress had to take action to reinstate the beleaguered program. Also, it was the third time agents and their policyholders were left in limbo as coverage dissolved and claims went unanswered.

History

The National Flood Insurance Act of 1968 was enacted on the heels of a destructive flood surge in 1965 caused by Hurricane Betsy. Due to historic issues of extensive property damage and loss of life, legislation was born. The Act launched the NFIP, designed to provide flood insurance protection for communities willing to adopt and enforce minimal floodplain management standards. The NFIP was also charged with identifying areas of high and low flood hazards and to set flood insurance rates for structures located in each flood hazard area.

With only a handful of revisions in its 42-year history, the NFIP has managed to stay afloat over the years by providing government-funded protection to residents and businesses, and to define floodplains and implement floodplain management requirements. Yet most experts would agree that the program is woefully out of date and in need of a facelift. Hence, each attempt to revamp the faltering program has caused strong debate and frustrating lapses in coverage.

Delays in reinstatement

How many lapses have there been in the program over the history of NFIP? Many, says Dr. Robert P. Hartwig, president of the Insurance Information Institute, headquartered in New York. Usually reauthorization happened quickly, he says, but the July reauthorization legislation wasn't being pushed through on its own—it was being attached to other pieces of legislation with the NFIP reinstatement riding the coat tails.

For now, the NFIP will get by on extensions. The most recent reauthorization extends the existing NFIP through September 30, 2011. Unfortunately, it maintains the program as is, which means that it will continue to operate in the red.

One piece of legislation approved by the U.S. House of Representatives—HR 5114, or The Flood Insurance Reform and Priorities Act of 2010—if enacted, would have reauthorized the NFIP for five years and added some key changes, such as increasing the maximum aggregate coverage amounts and raising the annual limitation on premium increases. These changes were applauded by many in the insurance industry, as well as those within Congress, but fell by the wayside as the September 30 deadline approached.

This was due in part to industry opposition to a provision that attempted to include controversial wind coverage. That amendment, sponsored by Representative Gene Taylor (D-Miss.), reignited a firestorm of controversy over wind coverage and its effects on the existence of the NFIP. The wind provision had been twice attached—and twice removed—from similar NFIP proposed legislation (Multiple Peril Insurance Act of 2009 - HR 1264) due to its unpopularity.

Nearly everyone from the Obama administration to insurance groups opposed the proposed addition of wind coverage to the already overburdened NFIP coffers. Says Hartwig, "The program itself doesn't want to write wind coverage. The NFIP understands it can't cover its costs today, never mind if wind were attached."He adds that the vast majority of wind coverage is provided by the private sector.

The General Accounting Office (GAO) noted that the debt of the NFIP to the U.S. Department of the Treasury in April 2010 stood at $18.8 billion.Moreover, the GAO says the program itself "is, by design, not actuarially sound" and is limited in what it can do to manage its risks, something traditional insurers can do quite easily. The NFIP can't build capital surplus, nor can it reject high-risk applicants, nor do its premium rates reflect actual flood risk, according to the GAO.

For the most part, intial support for HR 5114 was widespread because the bill promised what the National Association of Mutual Insurance Companies (NAMIC) says would have "phased in actuarially sound rates and increasing coverage limits."

Important NFIP info for agents

Now that the program has been reinstated, it's business as usual. But with each lapse in the program come stalled renewals, applications on hold, and claims left unanswered. "The problem for agents and others, like real estate brokers trying to get a home insured when the program was in hiatus, was that literally the flood coverage wasn't available," says Hartwig. As a result, he says, banks had to make decisions on whether to go ahead with real estate financing deals without the flood coverage. The coverage itself could not be put in place until the program was reinstated.

What impact will the extension have on agents and their customers? According to John Prible, vice president of Federal Government Affairs at the Independent Insurance Agents & Brokers of America (IIABA), his association wants to make sure there's no impact from the July lapse and extension. So far, so good. Prible says the program's retroactive renewal made all pending policy renewals, new policies, and claims valid for when they were submitted. Any 30-day waiting periods, he says, will be effective from the date the application was turned in, even if that occurred during the expiration. "It avoids a lot of disruption in the marketplace."

That beats the last time the program lapsed, which was a 24-hour period late in 2009/early 2010, says Prible. At that time Congress did not include retroactivity, which left many applications and renewals invalid. "Congress learned their lesson from that," Prible says.

And the September extension raised concerns as Congress waited literally until the final hour to pass the measure and have it signed by President Obama.

Unfortunately, while the one-year extension "will provide much needed stability and security for the NFIP and its policyholders," according to IIABA President/CEO Robert Rusbuldt, the lack of any reforms in the legislation means "our work with this program is far from over."

Reforms going forward

Since Hurricane Katrina in 2005, there has been a push for reform to the program, but no action. Instead, the debate has dragged on and the program has seen numerous temporary extensions. Luckily, the only issue to the public raised by the lapses in the program to date has been delayed payments and acceptance of flood insurance applications.

Rachel Racusen, a FEMA spokesperson, says that the July 2, 2010, extension of the NFIP came with that ever-important retroactive reauthorization, "allowing policies that were in process to continue to be issued and renewed.Individuals who were in the process of seeking to renew their policies or purchase a new policy after May 31, 2010, may now proceed with their purchase. Existing policies were never impacted by the lapse in Congressional authorization and continue uninterrupted."

That's not to say disruption doesn't occur each time the program lapses. But despite the problems plaguing the NFIP, the program still holds value. "It's worked really well for constituents," says Prible. "Do we need improvements around the edges? Absolutely. But the idea of putting even more exposure on the program—the last thing we want to see is the NFIP go bankrupt because they have too much exposure that they can't accurately price."

The author

Lori Widmer is a Philadelphia-based freelance writer and editor who specializes in risk management and insurance. She may be reached at lori@loriwidmer.com.