The Federal Emergency Management Agency (FEMA) recently announced two changes to provisions that will have an impact on private insurers who sell National Flood Insurance Program (NFIP) policies. The agency has thrown out the non-compete clause, and has also dictated that NFIP policies can now be terminated mid-term for a private flood policy.
Don’t hold your breath though – the changes don’t bode well for everyone in the flood insurance market. According to one expert, the non-compete clause places the “Write Your Own” (WYO) flood insurance companies, which sell NFIP-backed policies, at a distinct competitive advantage. Before this change, WYO companies were paid to write and service the NFIP’s flood policies, but were restricted from offering standalone private flood insurance that competed with the NFIP. Now, those restrictions have been removed.
“The NFIP years ago created the WYO program and pretended that these were private market participants and that the private market was participating, which was a bit of a joke because the private market was assuming no risk – literally they were just insurance agents for the US government, and they were well compensated for that – but it did achieve distribution for the NFIP,” said Craig Poulton, CEO of Poulton Associates and a speaker at the upcoming Flood Risk Summit in Miami, adding that now, the NFIP has taken the WYO participants and, “in addition to guaranteeing them a profit when they write for the US government because they bear no risk, they’ve allowed them to compete on their own book of business.”
Now, a WYO company can offer a lower rate to folks that they deem to be better risks. Non-WYO insurers in the space are meanwhile not seeing any benefits.
“We’ve developed some better products and functions and capabilities than the WYOs have at this point, and so the NFIP is essentially saying, we’re going to leave the non-compete, but we’re going to make it go away for the WYOs in such a way that it gives them a competitive advantage against non-WYO purveyors of private flood insurance, and that’s the real rub there,” explained Poulton.
A fairer option would have been to require WYO companies to expose insureds to multiple quotes, added Poulton, which would increase consumers’ choices when they’re purchasing the coverage.
“But, with the WYOs being part of the NFIP club, the NFIP has, in my opinion, treated the rest of the market unfairly and has not taken the consumer’s interest as its first priority,” he said.
The mid-term cancelation issue, meanwhile, has been a marked improvement, though Poulton told Insurance Business that it’s a return back to what was put in place by the NFIP in 2013, which was a cancelation code that allowed a private policy to replace an NFIP policy if a policyholder bought duplicate coverage from another non-government-backed source. Less than two years later, the NFIP walked the code back. Banks were instructed by the NFIP that if they paid the program a flood premium and their client then wanted to replace an NFIP policy with a private one, the NFIP would not give the premium back. Now, policyholders can switch policies at other times, beyond just at renewal.
“I applaud the NFIP for reinstating the code,” said Poulton. “They should have never undone it really, once they did it in 2013. At least they now have gone back and they’re treating the consumer with a more even hand.”
This change will also have an impact on the work of agents and brokers.
“It will allow the producers who are actively soliciting business to take a homeowners’ and an auto, and if they can save this person money, to write the entire account as opposed to leaving this little orphan flood insurance policy off to the side,” explained Poulton. “That will make a huge difference. Once they do that a few times to their neighborhood competitor, then he starts to realize that he better insulate his folks, and he starts to quote private flood. We don’t know how big the effect will be, but there will be a positive effect on consumer choice based on the NFIP’s reinstatement of this code.”
Take a deeper dive into this issue at the Flood Risk Summit on November 29.