Congressional Research Service: 'Introduction to National Flood Insurance Program' (Part 2 of 3)
(Continued from Part 1 of 3)
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Primary Flood Insurance Through the NFIP
Standard Flood Insurance Policies (SFIPs)
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Table 2. Maximum Available Coverage Limits for SFIPs by Occupancy Type
Source:
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Because SFIP coverage limits are often less than the value of a structure or the value of the property's contents, policyholders can obtain excess flood insurance to cover losses beyond the coverage limit. However, such excess coverage is not sold by the NFIP, and can only be purchased through the private insurance market.
Within the SFIPs sold by the NFIP, there are numerous policy exclusions that are often not understood by policyholders. For example, SFIPs do not provide coverage for alternative living expenses (e.g., the cost of staying in a hotel while a house is being repaired) or business interruption expenses, and SFIPs have limited coverage of basements or crawlspaces./56 In addition, the SFIP does not cover damage caused by earth movement, including landslides./57
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53 42 U.S.C. Sec.4013(a).
54 See 44 C.F.R. Part 61, Appendix A. Copies of the policy forms are also available on
55 42 U.S.C. Sec.4013(b).
56 For a basic guide to coverage under the SFIP, see
57 The exclusion for earth movement was particularly contentious in the aftermath of Hurricane Sandy. For a basic discussion, see
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Mandatory Mortgage Purchase Requirement
In a community that participates or has participated in the NFIP, owners of properties in the mapped SFHA/58 are required to purchase flood insurance as a condition of receiving a federally backed mortgage. By law and regulation, federal agencies, federally regulated lending institutions, and government-sponsored enterprises must require these property owners to purchase flood insurance as a condition of any mortgage that these entities make, guarantee, or purchase./59 Examples of the types of lenders that are mandated to issue regulations requiring the purchase of flood insurance related to mortgages include
* federal agency lenders, such as the
* the government-sponsored enterprises (GSEs),
* federally regulated lending institutions, such as banks covered by the
Property owners falling under this mandate may purchase flood insurance through the NFIP, or through a private company, so long as the private flood insurance provides "flood insurance coverage which is at least as broad as the coverage provided under a [SFIP] ... including when considering deductibles, exclusions, and conditions offered by the insurer."/61
The implementation of this requirement has proved challenging, with the responsible federal regulators (the
58 For additional information on the Special
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59 42 U.S.C. Sec.4012a.
60 42 U.S.C. Sec.4012a(b)(1)-(3). For examples of regulations and policies implementing this provision, see 12 C.F.R.
Parts 12 and 339 for regulations for the OCC and
61 42 U.S.C. Sec.4012a(b). For additional information on private flood insurance, see CRS Insight IN10450,
62
63
64 See, for example, the response on behalf of the
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On
* "allows institutions to rely on an insurer's written assurances in a private flood insurance policy stating the criteria are met; [and]
* clarifies that institutions may, under certain conditions, accept private flood insurance policies that do not meet the Biggert-Waters Act criteria."
The rule does not apply directly to other federal agencies, nor to the GSEs, which would be subject to separate rulemaking. On
Not all mortgages in the SFHA are affected by this mandatory purchase requirement. For example, a personal mortgage loan between two private parties (such as between family members), or a mortgage issued by a private mortgage company that is not then sold on the secondary market to a bank or entity like
Despite the mandatory purchase requirement, not all covered mortgages carry the insurance as dictated. There are no official statistics available from the federal mortgage regulators responsible for implementation of the mandate and no recent reports on compliance with the mandatory purchase requirement. A 2006 study of national compliance which was the MPR may be as low as 43% in some areas of the country (the Midwest), and as high as 88% in others (the West)./68 In a 2013 analysis done following Hurricane Sandy, one study found that approximately 65% of properties in
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65
66
67 The 77% figure was estimated using the overall percentage of mortgages held by parties subject to the mortgage requirement, and likely is subject to a degree of error. See
68
69
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A 2017 study of flood insurance in
The escrowing of insurance premiums may increase compliance with the mandatory purchase requirement. Federal mortgage regulators have required the escrowing of flood insurance premiums on certain mortgages in compliance with regulations issued after changes to the law made in 1994./71 Expanding upon existing requirements, Section 100209 of BW-12,72 as subsequently revised by Section 25 of HFIAA,/73 has required that regulated lenders start escrowing flood insurance for all mortgages, except if the lending institution is under a regulated size or the loan is a subordinate to another loan. This broader implementation of the escrowing provision began in
Preferred Risk Policies (PRPs)
Flood insurance is optional for properties outside the SFHA regardless of whether they have a federally backed mortgage. However, as there is still a risk of flooding outside the SFHA, members of NFIP participating communities with property located in the B, C, or X Zones of a FIRM may voluntarily purchase a lower-cost policy, which was until 2022 known as a Preferred Risk Policy (PRP). Unlike with properties in the SFHA, an individual may be denied a PRP if there is significant loss history for the property./75
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70
71 P.L. 103-325, Sec.523; 108 Stat. 2258.
72 P.L. 112-141, Sec.100209; 126 Stat. 920.
73 P.L. 113-89, Sec.25 128 Stat. 1030.
74 See 42 U.S.C. Sec.4012a(d)(1), and the final rule of
75 A Preferred Risk Policy is a Standard Flood Insurance Policy that offers low-cost coverage to owners and tenants of eligible buildings located in moderate- and low-risk flood zones in NFIP communities. For additional information on PRPs and restrictions, see
76 When a PRP policy is renewed under Risk Rating 2.0, its premium will begin increasing until it reaches the full risk-based rate. See
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Increased Cost of Compliance (ICC) Coverage
The NFIP requires most SFIP and PRP policyholders/77 to purchase what is in effect a separate insurance policy to offset the expense of complying with more rigorous building code standards when local ordinances require them to do so. This increased cost of compliance coverage is authorized in law, and rates for the coverage, as well as how much can be paid out for claims, are set by
For example, when a building is determined by a community to be substantially damaged/81 following a flood, floodplain management standards adopted by local communities can require the building to be rebuilt to current floodplain management requirements, even if the property previously did not need to do so. For instance, the new compliance standard may require the demolition and elevation of the rebuilt building to above the BFE. An ICC claim may then be submitted by the policyholder to offset the cost of complying with the elevation standard.
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77 For example, ICC coverage is not required on condominium units and content-only policies.
78 42 U.S.C. Sec.4011(b).
79 Ibid.
80 For example, for ICC premiums, see
81 44 C.F.R. Sec.59.1 defines "substantial damage" as damage of any origin sustained by a structure whereby the cost of restoring the structure to its before damaged condition would equal or exceed 50% of the market value of the structure before the damage occurred.
82 42 U.S.C. Sec.4011(b)(1).
83 For additional information on repetitive loss and repetitive loss provisions, see
84 See 42 U.S.C. Sec.4011(b)(3) and (4).
85 See, for example,
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Servicing of Policies and Claims Management
While
Currently, approximately 12.1% of the total NFIP policy portfolio is managed through the DSA, and 87.9% of NFIP policies are sold by the 51 companies participating in the WYO Program./88 Over the years, the balance between the number of policies serviced by the WYO Program or the DSA has evolved, with the WYOs covering approximately 50% of policies in 1986, and approximately 97% of policies in 2008./89 Because most purchasers of the NFIP policies never interface directly with a
Companies participating in the WYO Program are compensated through a variety of methods, as summarized in Table 3.
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86 See primarily 42 U.S.C. Sec.4081 and Sec.4018, and 44 C.F.R. Part 62.
87 The current Direct Servicing Agent is a company called
88 Email correspondence from FEMA Congressional Affairs staff,
89 For additional background on the estimates and history of the WYO Program, see, respectively,
90 For example, see
91 P.L. 112-141, Sec.100224; 126 Stat. 936.
92 BW-12 required the rulemaking to be completed by
93
94
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Table 3.Types of Compensation for WYO Companies
Source: Table 1 of
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Following Hurricane Sandy, there were concerns raised regarding the possible systematic underpayment of claims for flood losses through the NFIP./95 As a result of these issues,
Pricing and Premium Rate Structure
Except for certain subsidies, flood insurance rates in the NFIP are directed to be "based on consideration of the risk involved and accepted actuarial principles,"/99 meaning that the rate is reflective to the true flood risk to the property.
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95 For an analysis of the claims issues following Hurricane Sandy, see
96
97
98 Ibid.
99 42 U.S.C. Sec.4014(a)(1).
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Essentially,
Pre-FIRM Subsidy
While most premium rates in the NFIP are intended to represent the full flood risk of a given structure,
As of
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100 See, for example, CRS Report R45999, National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0, by
101 42 U.S.C. Sec.4015(c).
102 Email correspondence from FEMA Congressional Affairs staff,
103 For an historical prospective on the percentages of subsidized policies in the NFIP, see Figure 1 of
104 P.L. 112-141, 126 Stat. 917; and P.L. 113-89, 128 Stat. 1021-1022; respectively.
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Table 4. Phaseout of NFIP Pre-FIRM Premium Subsidy Following Legislation
Source: CRS analysis of P.L. 112-141 and P.L. 113-89. Adapted from Figure 3 from
Notes:
a. All properties with subsidies not being phased out at higher rates or already eliminated were required to begin paying actuarial rates following a five-year period, phased in at 20% a year, after a revised or updated flood insurance rate map (FIRM) was issued for the area containing the property. Thus, this provision would have gradually eliminated both pre-FIRM and grandfathering subsidies for all properties before being struck by the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA; P.L. 113-89). See Section 100207 of P.L. 112-141, 126 Stat. 919.
b. HFIAA permits individual property increases of up to 18%, but limits the rate class increases to 15% per year. See 42 U.S.C. Sec.4015(e).
c. Prior to BW-12,
d. Severe repetitive loss properties are those that have incurred four or more claim payments exceeding
e. Any property that has incurred flood-related damage in which the cumulative amounts of payments under the NFIP equaled or exceeded the fair market value of such property. See 42 U.S.C. Sec.4014(a)(2)(C).
f. Any property that has experienced or sustained substantial damage exceeding 50% of the fair market value or substantial improvement exceeding 50% of the fair market value. See 42 U.S.C. Sec.4014(a)(2)(E). Section 100205(a)(1)(A) of BW-12 (P.L. 112-141, 126 Stat. 917) originally set the substantial improvement amount at 30%, but HFIAA raised the percentage to 50% of fair market value.
g. As required by Section 100205(a)(1)(B) of BW-12 (P.L. 112-141, 126 Stat. 917), only for NFIP policies that lapsed in coverage as a result of the deliberate choice of the policyholder. If a policy lapses for other reasons, rate increases of 25% may have applied if the policy qualifies under one of the other property categories.
h. HFIAA revised the condition for policy lapse to be for NFIP all policies that lapsed in coverage unless the decision of the policyholder to permit a lapse in coverage was as a result of the property covered by the policy no longer being required to retain such coverage. For any policy that lapses but is not automatically charged full-risk rates, rate increases of 25% or 5% to 15% may apply if the policy qualifies under one of the other categories stated above. See 42 U.S.C. Sec.4014(g)(1).
i. Any prospective insured who refuses to accept any offer for mitigation assistance by
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Newly Mapped Subsidy
After the first year, the newly mapped rate will begin its transition to a full-risk rate, with annual increases to newly mapped policy premiums calculated using a multiplier that varies by the year of the map change./108 Annual increases are restricted to no more than 18% per year. As of
Grandfathering Cross-Subsidy
Using the authority to set rate classes for the NFIP and to offer lower than actuarial premiums,/110
Community Rating System
Through a program called the Community Rating System (CRS),
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105 P.L. 113-89, Sec.6; 128 Stat.1028, as codified at 42 U.S.C. Sec.4015(i).
106 For properties which are excluded from, or ineligible for, the newly mapped subsidy, see
107 The FRP for a newly mapped property is currently
108
109 Email correspondence from FEMA Congressional Affairs staff,
110 42 U.S.C. Sec.4013(a).
111 For a full description, see
112 For a description of the types of grandfathering, see
113 P.L. 112-141, Sec.100207 amended the law to require that when a property has a revised or updated flood rate class with a new flood map, the "risk premium rate charged for flood insurance on such property adjusted to accurately reflect the current risk of flood to such property" (126 Stat. 919), thus eliminating the ability to grandfather. This provision was struck by P.L. 113-89, 4; 128 Stat. 1022.
114 Email correspondence from FEMA Congressional Affairs staff,
115
116 42 U.S.C. Sec.4022(b)(1).
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In order to participate in the CRS program, a community must apply to
The CRS program provides an average 13.3% discount on SFIP premiums across the NFIP./120 The CRS discount is cross-subsidized into the NFIP program, such that the discount for one community ends up being offset by increased premium rates in all communities across the NFIP. Therefore, the average 13.3% discount for CRS communities is cross-subsidized and shared across NFIP communities through a cost (or load) increase of 15.3% to overall premiums./121 Thus in some circumstances, the discount provided to communities participating in the CRS program may be less than the expense of the overall CRS program.
Affordability Study and Framework
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117 For a full listing of possible creditable activities in the Community Rating System (CRS), see
118 See FEMA, Community Rating System Fact Sheet 2021, at https://www.fema.gov/fact-sheet/community-ratingsystem.
119 See FEMA, Community Rating System Eligible Communities,
120 Email correspondence from FEMA Congressional Affairs staff,
121 Ibid. Note that discounted policies such as Pre-FIRM and Newly Mapped also do not contain a load to offset CRS discounts; the CRS discounts simply further discount their premiums.
122 See P.L. 112-141, Sec.100236; 126 Stat. 957; as amended by P.L. 113-89, Sec.16; 128 Stat. 1026.
123
124 Sec.9(a) of P.L. 113-89, 128 Stat. 1024.
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Due 18 months following the submission of the Affordability Study, the deadline for the Framework, based on
Alternatively, an affordability program could be funded fully or partially by congressional appropriation./127
Risk Rating 2.0
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125 Sec.9(c) of P.L. 113-89, 128 Stat. 1024.
126
127 For additional information on NFIP affordability, see CRS Report R47000, Options for Making the National Flood Insurance Program More Affordable, by
128 For additional information on Risk Rating 2.0, see CRS Report R45999, National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0, by
129 See FEMA, Risk Rating 2.0: Equity in Action, at https://www.fema.gov/flood-insurance/risk-rating.
130 Ibid.
131 42 U.S.C. Sec.4015(e).
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Continues with Part 3 of 3
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The report is posted at: https://crsreports.congress.gov/product/pdf/R/R44593
Congressional Research Service: 'Introduction to National Flood Insurance Program' (Part 1 of 3)
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