House Financial Services Subcommittee Issues Testimony From Dual Special Flood President Small
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I. Introduction
My name is
II. About DUAL Special Flood and WSIA
DUAL is a member of the
III.
In 1968,
WSIA supported these actions and continues to. Since 2012, the private market has been able provide coverage in partnership with or as an alternative to the NFIP to enhance flood insurance coverage across the nation. However, there is room and certainly a need for growth in these coverages with a strong NFIP and a regulatory atmosphere that educates consumers and enables the private insurance market.
A. Current State of Surplus Lines
Generally speaking, consumers whose risks do not fit within the terms and limits of the NFIP or whose risks are declined by the standard market will have agents and brokers looking to the surplus lines market for solutions. Consumers will and do need alternatives to the NFIP when: (1) they need higher limits than the
Utilizing data from states with surplus lines stamping offices, which exist in 15 states to assist regulators in the oversight of insurers and producers transacting business in a given state's surplus lines market, we have seen a steady increase in flood insurance coverages written by the private market. In 2022, 10 of the 15 states with surplus lines stamping offices collected specific flood insurance policy data (
These 10 states reported
Of the
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Although flood coverage represents a relatively small proportion of the surplus lines market, it represents a market for consumers that would otherwise have no solution. For consumers who seek private market alternatives to the NFIP, the standard market serves as the primary solution for risks that fit within the standard pricing and underwriting criteria of standard insurance carriers. While the standard market is developing for flood insurance, it takes time for the standard market to develop the experience and data to support standard pricing and underwriting criteria. The surplus lines market has been developing primary flood solutions for decades, but both markets are still very young in their development. It is important to note the surplus lines market has been a solution for decades for flood insurance risks that do not qualify for the NFIP and for coverages that exceed the limits and terms of the NFIP.
B. Modernization of Regulatory Requirements has had a Positive Impact on Flood
Insurance
While WSIA and other industry members were supportive of BW12, it took time to see its reforms facilitate growth in the private market. The Final Rule for Loans in Areas Having Special Flood Hazards,/1 issued in 2019 by five federal agencies overseeing lenders (
Our analysis of surplus lines flood insurance data from the stamping office states over time illustrates that there is a positive correlation between surplus lines premium and the improved regulatory environment. Many of the stamping office states only recently began reporting flood data; however, the four largest states,
The number of policies written in these states during that time has increased even faster. In 2011, there were only 11,653 surplus lines flood policies written in these four states but, in 2022, over 204,000 policies were written, an average increase of 33% per year. Most of those new policies were written on residential risks, giving more options to consumers, just as BW12 intended.
Clearly the reforms of BW12 and subsequent regulatory clarifications have enabled growth in surplus lines flood insurance solutions, which benefits the NFIP and consumers.
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1 12 CFR Parts 22 and 172
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While we have illustrated how federal measures such as BW12 and the Final Rule positively correlate in the data from the state stamping offices specifically for surplus lines, recent data from the
The information is compiled from data collected through the NAIC Financial Annual Statement, which is required of all insurance carriers domiciled in
The NAIC's data illustrates increasing private market participation in flood insurance. In its
At the state level, we see the advantages that regulatory modernization has on the insurance market in general, but in particular with flood. We appreciate the efforts state insurance regulators are making to address gaps in flood insurance coverage which they undertake with the goal of increasing consumer options. The NAIC and its members regularly work with federal regulators, state legislators, and the industry to improve the regulatory environment to the extent it benefits their consumers. A number of states have taken specific actions related to surplus lines coverages that allow a consumer to more quickly assess their flood insurance options by providing exemptions for diligent searches in a variety of manners, including:
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* Six states provide diligent search exemptions with certain stipulations, including:
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2 See NAIC Private Flood Insurance Data Call webpage data call results under "Important Links."
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Two states have exempted flood insurance from premium tax (
IV. Next Steps Toward Developing a More Robust Private
We believe there are a number of other legislative and regulatory changes that would further improve flood insurance coverage options for consumers and impact their purchasing decisions.
A. Allowing Consumers to Move Freely between the NFIP and Private Market
Currently, if a policyholder leaves the NFIP, they cannot return under the same rating standard at which they left because their property will not be considered to have been "continuously covered" by mandatory flood insurance. This is intended to incent the policyholder to continuously maintain coverage and not let their policy lapse. However, what it does not contemplate is a consumer who wants to move back and forth between the NFIP and the private market, which unintentionally serves as a disincentive for consumers - whether it is staying with or returning to the NFIP.
In most insurance transactions or other consumer purchases, a consumer has the ability to regularly compare the products they purchase and make a choice as to what best fits their needs - and finances - at the time. However, in the case of flood insurance, if a consumer has an NFIP policy and considers moving to the private market, they are hesitant because they know they cannot return under the same rating standard should conditions in the private market change.
We strongly believe consumers should be considered to be "continuously covered" if they maintain either NFIP or private market coverage. This reform to current law would improve consumer choice and competition within the market, which directly benefits the consumer. This issue was highlighted as a barrier to progress by the
As a solution to this barrier, we strongly support H.R. 900, the Continuous Coverage for Flood Insurance Act, introduced by Reps. Luetkemeyer and Castor. This legislation allows consumers that leave the NFIP for the private market to be considered to have had continuous coverage for purposes of fulfilling their mandatory purchase requirement. Implementation of this legislation is a critical step to improving options for consumers and the overall flood insurance market.
B. Allowing Unearned Premium to be Returned to Consumers that Leave the NFIP Mid-
Term
Currently, if a NFIP policyholder leaves the NFIP after their policy has been bound or renewed, the unearned premium for that policy is nonrefundable from the NFIP if the policy is cancelled mid-term. In most private market insurance policies, a portion of the premium is considered "unearned" and is returned to the policyholder when a policy is cancelled before its expiration date. This issue is detailed in a joint insurance trades comment letter to
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We believe the inability to receive a refund of unearned premium from the NFIP serves as a disincentive for the consumer to consider the private market. There are two key scenarios within which this occurs. When an NFIP policy is automatically renewed, force-placed by a lender or similar situation where the policyholder did not intentionally plan to accept the renewal. Once the NFIP policy has been renewed, the policyholder must pay the entirety of the next policy year's premium with no opportunity for a refund if cancelled mid-term. Similarly, if a policyholder finds an alternative solution that better fits their needs and budget, they cannot cancel their policy mid-term without leaving that unearned premium on the table. Both situations make it very difficult for a consumer to have true choice in purchasing their flood insurance. We strongly support legislative proposals that would allow for any unearned premium to be refunded by the NFIP to the consumer.
C. Technical Changes to the Definitions of
The impact of the regulatory rules has been significant. They have brought about many of the clarifications that we sought in our support of the Flood Insurance Modernization and Market Parity Act, first introduced in the 114th
While we believe the agency rules have provided specific clarification that private flood policies are acceptable, especially surplus lines, we believe there continues to be important provisions in that legislation that will help improve the ability to provide private policies as proof of coverage.
Specifically, the language used to reference surplus lines policies in the underlying definition of private flood insurance needs to mirror the language of the Nonadmitted & Reinsurance Reform Act of 2010 (NRRA)./5 Although the current definition of private flood insurance was adopted in 2012, it used outdated language with respect to surplus lines regulation and is inconsistent with the changes
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5 15 U.S.C. Sec.8201
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A strong, financially sound NFIP is critical to a vibrant flood insurance program in
Leading up to the 2021 reauthorization, WSIA outlined our priorities for a long term reauthorization of the program (Attachment F) and joined other insurance trade associations in urging
Our industry continues to believe and support these comments.
E. Technology, Modeling, Modernization
Flooding is certainly not a new natural catastrophe, but the mitigation and underwriting of flood risks continues to evolve. Technology, in particular modeling, has significantly improved in recent times. In order to continue to make flood insurance affordable for those that are required to have it and appealing to those that need it but do not purchase it because it is not mandatory, modernization of the tools used to underwrite the risk must be used and continue to evolve. The private market has dedicated resources to these models and the more they are invested in and used, the better the benefit is for the consumer.
While wind and surge has been widely studied for coastal geographies, the inland pluvial and fluvial modeling is relatively new to the predictive process of determining the likelihood of a flood event. Risk Rating 2.0 is certainly a step in the right direction putting emphasis on the inland models as well as emphasis on the valuation of the property, which is a key component for underwriting accuracy and rate development on any type of property insurance. Rate adequacy is crucial for the insurance mechanism to actually work and fund claims. Equally important is to maintain a premium base that is sustainable for the longer term and to rely less and less on taxpayer contributions. As the NFIP continues to evolve, Risk Rating 2.0 and presumably the subsequent updates and releases should aid in developing the desired outcome of a financially stable insurance program.
V. Conclusion
We appreciate the opportunity to provide our perspective on the current flood insurance market.
In the decade since BW 12 passed, it is clear that we are seeing the evolution of
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Original text here: https://docs.house.gov/meetings/BA/BA04/20230310/115462/HHRG-118-BA04-Wstate-SmallP-20230310.pdf
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