Changes to the National Flood Insurance Program

Changes to the National Flood Insurance Program

Changes to the NFIP presents opportunities for private flood insurers to fill in gaps

For the first time in more than 20 years, there are plans to make changes to the National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency (FEMA). The NFIP began in 1968 and heavily subsidizes flood insurance.

Here’s what you should know when you’re working with your clients:

FEMA’s Risk Rating 2.0 changes would see flood insurance rates based on the actual flood risk and value of individual properties, providing more accurate pricing. If homeowners know how much it really costs to insure their home against flood risk, they might think twice about buying the property in the first place. An increase in rates also discourages developers from building in high-risk areas.

Although many policyholders will likely see rate decreases, those who live in coastal areas are likely to face significant year-over-year premium rate increases until the property reaches its maximum risk rate. 

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Filling in the gaps with private flood insurance

The NFIP does have some drawbacks, though, and that’s the gap swiftly being filled by private flood insurers. The structure of the NFIP is set by the government; its coverage offers little room to customize and there are no competitive rate options. While the government is essentially its own re-insurer using taxpayers’ dollars, private flood insurers have their own reinsurance programs. They generate a premium that closely reflects each property’s unique flooding risk using a rating structure that allows clients to shop around for the best rate.

While the NFIP offers replacement costs for primary residences only, private flood companies allow the option to add replacement cost coverage for contents and secondary residences. Under the NFIP, anything besides a primary residence, as well as contents, is covered at cash value.

Private flood carriers also offer optional coverage for:

  • Additional living expenses;
  • Pool repair and fill;
  • Business income coverage;
  • Enhanced coverage for detached structures.

Regulated institutions are required to accept flood insurance policies that meet the Biggert-Waters statutory definition of “private flood insurance.” As the new Homeowner Flood Form is introduced, regulated institutions will need to review, or revise, their private flood acceptance policies and procedures so they comply with the private flood insurance rule. 

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