Consider options for flood insurance
Some homeowners may save with private policy
Larry Blair of San Mateo buys flood insurance only because his lender requires it, and for years he thought his only option was the National Flood Insurance Program.
Then he read about private flood insurance on a Facebook page for people in his North Shoreview neighborhood. He ended up getting a private policy from “certain underwriters at Lloyd’s of London” that cost $993 this year. A National Flood Insurance Policy, with the same $250,000 coverage limit, would have cost $2,364, said his broker, Terry Tyson of FloodSmart Insurance in Anacortes, Wash.
Not every homeowner can save money with a private flood policy. Unlike national policies, they are not backed by the claimspaying ability of the federal government. Also, most companies offering private flood insurance are not licensed in all states where they do business and can choose which properties to insure.
Legislation to reauthorize the national program, which expires Sept. 30, is crafted to lure more companies back into private flood insurance, a market they abandoned long ago, leading to the creation in 1968 of the national program.
Today, the federally backed program accounts for the vast majority of U.S. flood insurance. The program sells policies through insurance companies, which also manage the claims.
Only a relative handful of companies sell truly private insurance. Traditionally, they sold excess coverage to homeowners who wanted more than the maximum $250,000 allowed under the national plan. Before Hurricane Harvey hit, more were starting to offer primary or stand-alone coverage, partly because the federal program has been phasing out premium subsidies. Also, private companies do not have to charge some fees and subsidies that apply to national policies.
More than 50 insurers issued policies with annual premiums totaling $376 million last year, according to a National Association of Insurance Commissioners report. By comparison, the national program reported $3.3 billion in premiums.
Amy Bach, executive director of the consumer group United Policyholders in San Francisco, said she’s afraid that Harvey “is going to have a chilling effect on the green sprouts of competition for consumers who want to buy insurance outside the National Flood Insurance Program.”
Congress wants private insurance to play a larger role, because the national program, thanks largely to Hurricanes Katrina and Sandy, owes the U.S. Treasury almost $25 billion. In February, the Government Accountability Office said the program “likely will not generate sufficient revenues to repay” that debt and future claims.
One reason is that some homeowners are paying rates that “do not fully reflect the risk of flooding,” the office said. For example, if a homeowner has national flood insurance, and a new flood map puts them at higher risk, they can be protected from some premium increases as long as they maintain continuous coverage under the national program. This is known as grandfathering.
If they go out of the program — because they let their policy lapse or switch to a private policy — they cannot come back into the national program at their grandfathered rate.
Some of the reauthorization bills would let policyholders re-enter at the grandfathered rates.
The bills would also would make changes designed to get getting more lenders to accept private flood insurance in lieu of federal.
Flood insurance is required if a mortgage is backed by government agencies including Fannie Mae and Freddie Mac and the property is in certain flood-prone areas.
The law allows, but does not require, lenders to accept private flood insurance if it meets certain criteria. For example, it must be “as broad as” the federal policy, but what that means is not entirely clear, and some lenders won’t accept private insurance. The Federal Housing Administration accepts only federal insurance on loans it backs.
The National Association of State Insurance Commissioners, which represents state regulators, said it supports legislation that, among other things, “clarifies private flood insurance meets the mandatory purchase requirement.”
The Pennsylvania Insurance Department is “very much in support of consumers having the option of private insurance,” said Ron Ruman, a spokesman for the department. “Here in Pennsylvania, consumers have been able to find comparable coverage in the private market at considerably lower cost.” The number of private flood insurance policies in the state had grown to roughly 3,300 in February from 1,500 the year before.
Robert Hunter, director of insurance with the Consumer Federation of America, wants to expand private flood insurance, but not the way some of the bills propose. He worries that private insurers will “cherrypick” the lowest-risk customers, leaving highrisk customers in the national program, where they would face higher rates.
Hunter said private companies should have to charge the same fees and surcharges that the public plan does. These pay for reducing the program’s debt, flood mapping and other services. And he doesn’t think the program should allow re-entry at grandfathered rates.
He also said private flood insurance should be licensed or “admitted” in the states where they sell policies. Today, most companies selling private flood insurance are “surplus lines” carriers and face far less regulation than companies that are licensed.
The surplus carriers “don’t have to file rates. They can choose not to renew a product or increase rates by 50 percent,” without regulators’ approval, said Ned Dolese, co-founder of Coastal American Insurance Co. His company sells flood insurance as an endorsement to a homeowners policy, but only in Alabama and Mississippi, where it is licensed.
Most importantly, surplus lines carriers are not covered by state guarantee funds, which pay claims, up to a point, if an insurance company becomes insolvent.
If you are considering private flood insurance:
Make sure the company is rated A or better from a well-known rating agency such as A.M. Best, Dolese said.
Read the policy carefully, and make sure it is “equivalent or better” insurance than a federal policy, Bach said.
See under what conditions the private policy could be canceled, Hunter said.
If your lender requires flood coverage, make sure it will accept private insurance.
If your insurance agent can’t offer private flood coverage, try getting a quote from a reputable independent agent or broker.
Finally, find out if you are grandfathered and if so, be very wary about leaving the federal program.