The new federal rule requiring mortgage lenders to accept both private and government-backed flood insurance policies has received approval from some insurance leaders, while others are remaining cautious about its implications for the private flood insurance market.
The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency approved the rule at the end of January, with the hopes of increasing the availability of private flood insurance in states that are particularly prone to flooding, such as Texas, Louisiana, and Florida. While the rule is set to go into effect in July, regulations that would force banks to accept private flood insurance have been up for discussion for several years now, dating back to provisions in the Biggert-Waters Flood Insurance Reform Act of 2012.
“The reality is we’ve expected this for quite some time. This is really a reinforcement of something that we see as a very sensible way to get flood insurance to those who need it, including those who are not part of the federal program today,” said Keith Wolfe (pictured, above), president of US property and casualty at Swiss Re. “This is just one minor step, we think, in a grander scheme of getting private flood market penetration up to a considerably higher level than what it is today.”
The impact of the rule should be felt mainly in the personal lines space, where independent insurance agents have been turning homeowners on to the NFIP product. Now, the rule reinforces that private products are equally as suitable for banking requirements when you have a mortgage on a property, explained Wolfe.
“What this will allow for is the private market to offer probably more customer-friendly solutions where you don’t need to buy multiple policies to get the same level of coverage you were interested in in the past, and it will still meet the requirements the bank has for covering flood insurance without necessarily having to engage multiple parties,” he said.
Currently, the biggest hurdle when it comes to raising awareness around flood risk is those individuals who are not required by banks and lenders to buy flood insurance because their properties don’t fall within FEMA’s high risk flood zone boundaries. Hurricanes in recent years have proven that these homeowners’ exposure is often higher than expected.
“Where we saw challenges, especially in Texas with Harvey, was that almost 80% of the flood damage down there was incurred in locations that were not required to buy flood insurance at all, which clearly didn’t mean that they had no flood risk,” said Wolfe. “We think that the private market has a huge opportunity here to get people to understand better what their flood risk truly is and that flood maps are not necessarily an end-all, be-all to determine your flood risk.”
There are some setbacks to the new rule, however, since the devil is in the details. Specifically, regulated lending institutions will have to “exercise their discretion to accept certain policies issued by private insurers that do not contain all of the criteria in the statutory definition of ‘private flood insurance,’” according to the final rule, which one expert takes issue with.
“What they’ve done is they have continued the existing paradigm where under a bank examiner comes a de facto insurance regulator. Because there continues to be no adjudicator defined as to who makes the decision, they’re pretending to give discretionary ability to a bank while making the word ‘discretionary,’ as they use it, an oxymoron because they put conditions on your discretion,” said Craig Poulton (pictured, below), CEO of private flood insurer Poulton Associates. “They continue to create this broad and, to the uninitiated, ‘reasonable’ discretionary requirement, but who decides?”
The agencies involved concluded that the final rule’s discretionary acceptance provision needs to be “less burdensome and restrictive” than originally proposed, while also permitting lending institutions to “accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of ‘private flood insurance’ if four criteria are met,” though Poulton calls that criteria subjective.
“The real issue is that the lending regulators still tell the lenders there’s criteria, but they don’t tell them who will decide what is reasonable when administering the criteria and they don’t give them a compliance aid,” said Poulton, adding that there will be many circumstances where discretion comes into play, such as when a community may want to buy a parametric policy.
“The community gets together and they buy this parametric flood policy [that] applies to all homes, and they try to take a fair approach and say, ‘we’re going to distribute the amount we’re paid under the parametric program on a prorate basis based on the market value of the homes shown on the county or the city’s register as of the date of the loss,’” said Poulton. “Tell me what bank is going to say, ‘that for sure complies with these four criteria.’ It’s a moving target. You don’t how much they’re going to be paid because it’s a parametric policy.”