Congressional Research Service: 'Private Flood Insurance & National Flood Insurance Program' (Part 1 of 2)
Here are excerpts:
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Summary
The National Flood Insurance Program (NFIP) is the main source of primary flood insurance coverage in
In recent years, private insurers have expressed increased interest in providing flood coverage. Advances in the analytics and data used to quantify flood risk along with increases in capital market capacities may allow private insurers to take on flood risks that they shunned in the past. Private flood insurance may offer some advantages over the NFIP, including more flexible flood polices, integrated coverage with homeowners insurance, or lower-cost coverage for some consumers. Private marketing might also increase the overall amount of flood coverage purchased, reducing the amount of extraordinary disaster assistance necessary to be provided by the federal government. Increased private coverage could reduce the overall financial risk to the NFIP, reducing the amount of NFIP borrowing necessary after major disasters.
Increasing private insurance, however, may have some downsides compared to the NFIP. Private coverage would not be guaranteed to be available to all floodplain residents, unlike the NFIP, and consumer protections could vary in different states. The role of the NFIP has historically been broader than just providing insurance. As currently authorized, the NFIP also encompasses social goals to provide flood insurance in flood-prone areas to property owners who otherwise would not be able to obtain it, and to reduce government's cost after floods. Through flood mapping and mitigation efforts, the NFIP has tried to reduce the future impact of floods, and it is unclear how effectively the NFIP could play this broader role if private insurance became a large part of the flood marketplace. Increased private insurance could also have an impact on the subsidies that are provided for some consumers through the NFIP.
The 2012 reauthorization of the NFIP (Division F, Title II of P.L. 112-141) included provisions encouraging private flood insurance; however, various barriers have remained. Legislation passed the House in the 114th
The NFIP is currently operating under a short-term reauthorization until
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Contents
Introduction ... 1
Background ... 1
Objectives of the NFIP ... 2
Primary Flood Insurance Through the NFIP ... 3
The Mandatory Purchase Requirement ... 3
Premium Subsidies and Cross-Subsidies ... 4
NFIP Reauthorization and Legislation ... 5
117th
Prior Congresses ... 5
The Current Role of Private Insurers in the NFIP ... 6
Servicing of Policies and Claims Management ... 6
Reinsurance ... 8 Private Flood Insurance Outside the NFIP: Issues and Barriers ... 10
Flood Insurance Coverage "at Least as Broad as" the NFIP ... 11
Continuous Coverage ... 12
The "Non-Compete" Clause ... 12
NFIP Subsidized Rates ... 13
Regulatory Uncertainty ... 15
Ability to Assess Flood Risk Accurately ... 15
Adequate Consumer Participation ... 16
Potential Effects of Increased Private Sector Involvement in the Flood Market ... 17
Increased Consumer Choice ... 17
Variable Consumer Protections ... 18
Adverse Selection ... 18
Issues for NFIP Flood Mapping and Floodplain Management ... 19
Concluding Comments ... 20
Tables
Table 1. NFIP Reinsurance Purchases ... 9
Table A-1. Provisions Related to
Appendixes
Appendix. Provisions Related to
Contacts
Author Information ... 27
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Introduction
The NFIP has paid a total of nearly
Expanding the role of private insurers, including reinsurers, has been seen by many as an answer to the variability of the financial position of the NFIP./3
Increasing participation by private insurers could transfer more flood risk from policyholders to the private insurance sector, as opposed to transferring the risk to the federal government through the NFIP. In addition to the possible advantage to the NFIP, the increased availability of flood insurance as private companies enter the market may benefit households and businesses, as insured flood victims are likely to recover more quickly and more fully after a flood.
Private insurer interest in directly providing and underwriting flood risk has increased in recent years. Advances in the analytics and data used to quantify flood risk along with increases in capital market capacities may allow private insurers to take on flood risks that they shunned in the past. However, increasing the private sector role in providing flood insurance coverage directly to consumers may have implications for the operations and fiscal solvency of the NFIP as currently structured. Increased access to private flood insurance could provide individual policyholders with a wider choice of coverage and possibly cheaper premiums, but may also lead to variable consumer protections.
The extent to which private insurance companies participate in the
This report describes the current role of private insurers in
Background/5
The NFIP is the main provider of primary flood insurance coverage for residential properties in
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1 Email correspondence from FEMA Congressional Affairs staff,
2 Email correspondence from FEMA Congressional Affairs staff,
3
4 P.L. 117-328. For further information on NFIP reauthorization, see CRS Insight IN10835, What Happens If the National Flood Insurance Program (NFIP) Lapses?, by
5 For more detail on the NFIP, see CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
6 Statistics on the National Flood Insurance Program (NFIP) policy and claims are available from the
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In FY2019, the program collected about
In FY2020, the program collected about
Nationally, over 22,000 communities participate in the NFIP./8
The role of the federal government in flood insurance is in contrast to the majority of other property and casualty risks, such as damage from fire or accidents, which are covered by a broad array of private insurance companies. Total direct written premiums for private flood insurance in 2019 totaled
Total premiums for private property and casualty insurance in 2018 totaled
Objectives of the NFIP
The NFIP has two main policy goals: (1) to provide access to primary flood insurance, thereby allowing for the transfer of some of the financial risk of property owners to the federal government; and (2) to mitigate and reduce the nation's comprehensive flood risk/11 through the development and implementation of floodplain management standards. A longer-term objective of the NFIP is to reduce federal expenditure on disaster assistance after floods.
As a public insurance program, the NFIP is designed differently from the way in which private sector companies provide insurance. As currently authorized, the NFIP also encompasses social goals to provide flood insurance in flood-prone areas to property owners who otherwise would not be able to obtain it, and to reduce the government's cost after floods./12
The NFIP also engages in many "non-insurance" activities in the public interest: it disseminates flood risk information through flood maps, requires communities to adopt land use and building code standards in order to participate in the program, potentially reduces the need for other post-flood disaster aid, contributes to community resilience by providing a mechanism to fund rebuilding after a flood, and may protect lending institutions against mortgage defaults due to uninsured losses.
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7 Fee data from The Watermark Third Quarter 2021, https://www.fema.gov/sites/default/files/documents/fema_fimawatermark-FY2021-Q3.pdf.
8 Detailed information about which communities participate and where is available from the Community Status Book, found on
9
10 Premium amounts used are net premiums written and asset amounts are admitted assets from
11 In the context of this report, comprehensive flood risk means that the risk includes both financial risk (i.e., physical damage to property), and also the risk to human life.
12 See 82 Stat. 573 for text in original statute (Section 1302(c) of P.L. 90-448). This language remains in statute (see 42 U.S.C. Sec.4001(c)).
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The benefits of such tasks are not directly measured in the NFIP's financial results from selling flood insurance./13
From the inception of the NFIP, the program has been expected to achieve multiple objectives, some of which may conflict with one another:
* to ensure reasonable insurance premiums for all;
* to have risk-based premiums that would make people aware of and bear the cost of their floodplain location choices;
* to secure widespread community participation in the NFIP and substantial numbers of insurance policy purchases by property owners; and
* to earn premium and fee income that, over time, covers claims paid and program expenses./14
Primary Flood Insurance Through the NFIP
The NFIP offers flood insurance to anyone in a community that chooses to participate in the program. Flood insurance purchase generally is voluntary, except for property owners who are in a Special
Flood insurance policies through the NFIP are sold only in participating communities and are offered to both property owners and renters and to residential and nonresidential properties. NFIP policies have relatively low coverage limits, particularly for nonresidential properties or properties in high-cost areas. The maximum coverage for single-family dwellings (which also includes single-family residential units within a 2-4 family building) is
The Mandatory Purchase Requirement
By law and regulation, federal agencies, federally regulated lending institutions, and government-sponsored enterprises (GSEs)/17 must require the property owners in an SFHA to purchase flood insurance as a condition of any mortgage that these entities make, guarantee, or purchase./18
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13
14
15 A Special
16 This includes mortgages from banks insured by the
17
18 42 U.S.C. Sec.4012a.
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In addition to this legal mandatory purchase requirement, lenders may also require borrowers outside of an SFHA to maintain flood insurance as a means of financially securing the property.
In order to comply with this mandate, property owners 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" of the NFIP, among other conditions./19
The mandatory purchase requirement is enforced by the lender, rather than
Property owners who do not obtain flood insurance when required may find that they are not eligible for certain types of disaster assistance after a flood./21
Premium Subsidies and Cross-Subsidies
Flood insurance rates in the NFIP generally are directed by statute to be "based on consideration of the risk involved and accepted actuarial principles,"/22 meaning that the rate is reflective of the true flood risk to the property. However,
There are three main categories of properties that pay less than full risk-based rates:
* Pre-FIRM: properties that were built or substantially improved before
* Newly mapped: properties that are newly mapped into a SFHA on or after
* Grandfathered: properties that were built in compliance with the FIRM in effect at the time of construction and are allowed to maintain their old flood insurance rate class if their property is remapped into a new flood rate class./27
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19 42 U.S.C Sec.4012a(b). For additional information on private flood insurance, see CRS Insight IN10450,
20 42 U.S.C Sec.4012a(f).
21 For additional information, see CRS Report R44808, Federal Disaster Assistance: The National Flood Insurance Program and Other Federal Disaster Assistance Programs Available to Individuals and Households After a Flood, by
22 42 U.S.C. Sec.4014(a)(1).
23 For a full discussion of NFIP subsidies and cross-subsidies, see the section on Pricing and Premium Rate Structure in CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
24 Government Accountability Office (GAO),
25 42 U.S.C. Sec.4015(c).
26 Sec.6 of P.L. 113-89, 128 Stat.1028, as codified at 42 U.S.C. Sec.4015(i).
27 For a full description, see
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NFIP Reauthorization and Legislation
117th
The NFIP is currently authorized until
Prior Congresses
In the 115th
Representatives passed H.R. 2874 (The 21st Century Flood Reform Act) by a vote of 237-189 on
Three bills were introduced in the
* S. 1313 (Flood Insurance Affordability and Sustainability Act of 2017);
* S. 1368 (Sustainable, Affordable, Fair, and Efficient [SAFE] National Flood Insurance Program Reauthorization Act of 2017);/29 and
* S. 1571 (National Flood Insurance Program Reauthorization Act of 2017).
None of these bills were considered by the full
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28 The statute for the NFIP does not contain a comprehensive expiration, termination, or sunset provision for the whole of the program. Rather, the NFIP has multiple different legal provisions that generally tie to the expiration of key components of the program. Unless reauthorized or amended by
29 A similar bill was introduced in the House, H.R. 3285.
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The four reauthorization bills in the 115th
In the 116th
The Current Role of Private Insurers in the NFIP
Private insurers can be involved in the flood insurance market in a number of ways, including (1) by helping to administer the NFIP; (2) by sharing risk with the NFIP as a reinsurer; or (3) by taking on risk themselves as a primary insurer, where the insurer contracts directly with a consumer. Since 1983, private insurers have played a major role in administering the NFIP, including selling and servicing policies and adjusting claims, but they largely have not been underwriting flood risk themselves./33 Instead, the NFIP retains the direct financial risk of paying claims for these policies. The NFIP has purchased reinsurance since 2016, thus transferring some of the flood risk to the private sector.
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30 See, for example,
Thune wants to see the
32 H.R. 3872 was introduced on
33 Underwriting risk refers to the potential loss to an insurer or reinsurer. An insurer takes on this risk in return for a premium, and promises to pay an agreed amount in the event of a loss. See NAIC, Glossary of Insurance Terms, http://www.naic.org/consumer_glossary.htm#U.
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Servicing of Policies and Claims Management
While
With either the DSA or WYO program, the NFIP retains the actual financial risk of paying claims for the policy, and the policy terms and premiums are the same. Approximately 13% of the total NFIP policy portfolio is managed through the DSA and 87% of NFIP policies are sold by the 57 companies participating in the WYO program./37
Companies participating in the WYO program are compensated through a variety of methods, but this compensation is not directly based on the costs incurred by the WYOs. In the Biggert-Waters Flood Insurance Reform Act of 2012 (Division F, Title II of P.L. 112-141, hereinafter BW-12),
In the 115th
In the 116th
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34 See primarily 42 U.S.C. Sec.4081 and Sec.4018, and 44 C.F.R. Part 62.
35 The current Direct Servicing Agent is a company called
36 Severe repetitive loss properties are those that have incurred four or more claim payments exceeding
37 Email correspondence from FEMA Congressional Affairs staff,
38 Sec.100224 of P.L. 112-141, 126 Stat. 936.
39
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Reinsurance
In the Homeowner Flood Insurance Affordability Act of 2014 (P.L. 113-89, HFIAA),
Transfer of risk to the private sector through reinsurance, however, is unlikely to lower the overall cost of the NFIP because reinsurers understandably charge
Reinsurance has been purchased by
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40 Reinsurance is defined as a transaction between a primary insurer and another licensed (re)insurer where the reinsurer agrees to cover all or part of the losses and/or loss adjustment expenses of the primary insurer. See NAIC, Glossary of Insurance Terms, http://www.naic.org/consumer_glossary.htm#R.
41 See Sec.10 of P.L. 113-89, 128 Stat. 1025, as codified at 42 U.S.C. Sec.4081(e).
42 GAO,
43 Ibid.
44
45 The NFIP reinsurance purchases have been designed to cover claims for only one large flood, and smaller flood claims will continue to be paid from NFIP premiums.
46 For more details see
47 For example, the 2020 traditional reinsurance purchase covered 10.25% of NFIP losses from
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In the 115th
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Table 1. NFIP Reinsurance Purchases
Source:
a. Premiums of
b. Premiums of
c. Premiums of
d. Premium of
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The NFIP has claimed on reinsurance once, after the losses experienced after Hurricane Harvey, which resulted in over
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Continues with Part 2 of 2
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The report is posted at: https://crsreports.congress.gov/product/pdf/R/R45242
Congressional Research Service: 'Private Flood Insurance & National Flood Insurance Program' (Part 2 of 2)
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