ConsiderationsofPrivateFlood

December 9, 2019

The following document provides information regarding ways for a department of insurance (DOI) to

encourage the growth of private residential flood insurance.

Currently, the Property and Casualty Insurance (C) Committee is considering enhancing the

collection of private flood data. These efforts include: 1) collecting information that separates

residential private flood insurance premiums from commercial private flood insurance premiums; and

2) breaking the information down by stand-alone policies and endorsements to homeowners

insurance policies, by both first dollar and excess. Additionally, the proposed supplement will provide

claims and policy data.

Furthermore, it has been proposed that lender-placed flood insurance data be collected on the Credit

Insurance Experience Exhibit and private flood insurance data be collected for the surplus lines

market through the Surplus Lines (C) Working Group.

The Market Regulation and Consumer Affairs (D) Committee has developed a private flood insurance

line for the Market Conduct Annual Statement (MCAS), which will collect 2020 data in 2021. The data

is expected to follow the same format as the homeowners MCAS with a focus on private flood

insurance.

Other considerations for the Property and Casualty Insurance (C) Committee include:

x Considering ways to incorporate a conforming conditions clause in the form approval process.

x Referring state law conflicts relating to statute of limitations and cancellation/renewal provisions to

the Government Relations Leadership Council (GRLC) to resolve at the federal level.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

CONSIDERATIONS FOR STATE INSURANCE REGULATORS

IN BUILDING THE PRIVATE FLOOD INSURANCE MARKET

DECEMBER 9, 2019

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

Table of Contents

BACKGROUND AND PURPOSE .........................................................................................................................................................1

OVERALL STATE OF THE FLOOD INSURANCE MARKET ....................................................................................................................3

STATE ACTION ..................................................................................................................................................................................7

Legislative and Regulatory Changes ................................................................................................................................................................................. 7

Consumer Information ......................................................................................................................................................................................................... 7

Agent and Lender Actions ................................................................................................................................................................................................... 7

LEGISLATIVE AND REGULATORY CHANGES .....................................................................................................................................8

Supporting Private Flood Insurance Legislation .............................................................................................................................................................. 8

Approving Private Flood Insurance Products ................................................................................................................................................................... 8

TAILORING RATE AND FORM REQUIREMENTS FOR PRIVATE FLOOD INSURANCE COVERAGE ......................................................8

EXPORT LIST / WAIVING DILIGENT SEARCH REQUIREMENTS ...........................................................................................................8

Allowing Private Flood Insurers to Submit Rates on an Informational Basis .............................................................................................................. 9

CONSUMER INFORMATION ..............................................................................................................................................................9

Consumer Outreach .............................................................................................................................................................................................................. 9

Listing Private Flood Insurance Writers on a DOI Website ........................................................................................................................................ 10

Collecting Residential Private Flood Insurance Data .................................................................................................................................................... 10

AGENT AND LENDER ACTIONS.......................................................................................................................................................10

Continuing Education and Producer Licensing Requirements ....................................................................................................................................... 10

Agent Education .................................................................................................................................................................................................................. 11

Lender Education ................................................................................................................................................................................................................. 11

MARKET UNCERTAINTY AND THE DEVELOPMENT OF A PRIVATE FLOOD INSURANCE MARKET .................................................11

SUMMARY .......................................................................................................................................................................................13

Appendix I – Actions Florida Has Taken .........................................................................................................................................14

FLORIDA’S FORM FILING PROCESS EXAMPLE ............................................................................................................................................................. 14

Subject to the Requirements of Florida’s Flood Statute .......................................................................................................................................... 14

Items Not Subject to the Requirements of Florida’s Flood Statute ........................................................................................................................ 14

REVIEW OF FLORIDA’S FORM FILING PROCESS .............................................................................................................................. ............................ 14

How the Florida OIR Reviews Form Filings Subject to its Flood Statute .............................................................................................................. 14

State Law Conflict ......................................................................................................................................................................................................... 14

FLORIDA RATE PROCESS EXAMPLE ............................................................................................................................................................................... 15

FLORIDA FLOOD STATUTE – FLOOD POLICY TYPES ................................................................................................................................................. 15

APPENDIX II – BARRIERS TO THE RESIDENTIAL PRIVATE FLOOD INSURANCE MARKET ................................................................16

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

Flood Coverage Being “At Least as Broad as” the NFIP ............................................................................................................................................. 16

Continuous Coverage......................................................................................................................................................................................................... 16

Non-Compete Clause ......................................................................................................................................................................................................... 17

NFIP Subsidized Rates ....................................................................................................................................................................................................... 17

Ability to Assess Flood Risk Accurately ........................................................................................................................................................................... 17

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

BACKGROUND AND PURPOSE

State insurance regulators have first-hand experience with the devastating effects that floods have on

the constituents in their states, and they believe it is critical that flood insurance is both available and

affordable in order to encourage purchases that thereby protect homes, businesses and personal

property. Although private flood insurance is being written largely in the commercial market, this paper

will focus on the residential flood insurance market.

For more than a half-century, the federal government’s National Flood Insurance Program (NFIP) has

been the primary player in the residential flood insurance market, underwriting most policies while

private insurers have largely focused on a relatively small residential supplemental market. While the

NFIP has done a laudable job in making flood insurance available for millions of residential properties,

a significant flood insurance gap exists across the U.S.

with flood event after flood event revealing a

substantial number of damaged properties being uninsured.

A Federal Emergency Management

Agency (FEMA) analysis from 2018 indicates that 69% of American homes in high-risk flood zones do

not have flood insurance. Concurrently, there has been a heightened interest amongst private carriers

to expand their residential flood insurance offerings, greatly assisted by the development of more

sophisticated flood mapping and risk modeling technologies.

Funding for continuation of the NFIP expired in September 2017, and since then, the U.S. Congress

has passed numerous short-term extensions, and more are expected. The federal Biggert-Waters

Flood Insurance Reform Act of 2012 (Biggert-Waters) requires lenders to accept private flood insurance

policies meeting certain requirements just as they would an NFIP policy to satisfy the federal mandatory

purchase mortgage requirement. The NAIC has been engaged legislatively and with the federal

banking regulators on their rulemaking.

In February 2019, after six years of deliberation, the federal

banking regulators finalized their rule. The final rule provides the requirements

for lenders to accept

provide flood insurance policies. The rule also provides lenders the option to accept private flood

insurance policies that do not meet the mandatory acceptance requirements set forth in Biggert-Waters

subject to certain conditions.

State insurance regulators and the NAIC support a long-term NFIP reauthorization, as well as the

facilitation of increased private sector involvement in the sale of flood insurance, which can help ensure

that consumers have access to multiple options. In 2016, the NAIC developed the “NAIC Principles for

National Flood Insurance Program (NFIP) Reauthorization”

and has testified in Congress on the

importance of ensuring a viable private flood insurance market as an alternative to the NFIP.

https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Moving-the-Needle-on-Closing-the-Flood-Insurance-Gap.pdf.

www.pciaa.net/docs/default-source/industry-issues/4_lessonslearned.pdf.

https://www.naic.org/documents/government_relations_comment_letter_federal_banking_private_flood_insurance.pdf.

The key conditions in the final rule are: 1) a requirement that the policy provide sufficient protection for a designated loan, consistent with general safety and

soundness principles; and 2) a requirement that the regulated lending institution document its conclusion regarding the sufficiency of protection in writing. The final

rule also allows regulated lending institutions to exercise their discretion to accept certain plans providing coverage issued by “mutual aid societies.”

https://www.naic.org/documents/government_relations_161019_nfip_guiding_principles.pdf.

https://www.naic.org/documents/government_relations_160113_testimony_private_flood_insurance.pdf.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

Following from this NAIC action, the purpose of this document is to provide state insurance

regulators with concrete actions that can be and/or have been taken to assist with the

development of the burgeoning private insurance market for residential flood insurance.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

OVERALL STATE OF THE FLOOD INSURANCE MARKET

According to the most recent data collected by the NAIC (Table 1), approximately $644 million of direct

premium was written in the private flood insurance market in 2018 throughout the U.S. In 2018, the

private flood insurance market represented 15% of the total flood insurance market ($4.2 billion). The

private flood insurance market has been growing over the past few years, with the $644 million in direct

premium written in 2018 being an increase of 9% from 2017 direct written premiums, and an increase

of 71% since 2016. In 2018, California, Florida, Louisiana, New Jersey, New York, Pennsylvania,

Puerto Rico and Texas each had $20 million or more of private flood insurance direct written premium

(Table 1), with these eight states/jurisdictions representing nearly 60% of the total private flood

insurance market.

It is important to note that the NAIC Annual Statement data used in Table 1 and Table 2 does not

differentiate between residential private flood insurance premium and commercial private flood

insurance premium. The NAIC is exploring data collection via a supplement and/or data call to collect

data for residential private flood insurance and commercial private flood insurance separately.

Beyond this aggregate view of premium being written by state, for a relative sense of market penetration

and growth of the private flood market, two other views of the NAIC data are presented: 1) private flood

as a percentage of total flood written per state in 2018 (Table 1); and 2) private flood growth by state

from 2016 to 2018 (Table 2).

Table 1: Private Flood as a Percentage of Total Flood Written per State in 2018

State

Direct Premium

Written – Private

Direct Written

Premium – NFIP Total

Private

Flood

Percentage

AK $ 726,128 $ 2,173,734 $ 2,899,862 25%

AL $ 4,717,310 $ 37,369,849 $ 42,087,159 11%

AR $ 2,918,840 $ 13,387,226 $ 16,306,066 18%

AS $ 17 $ 38,356 $ 38,373 0%

AZ $ 13,616,250 $ 20,785,412 $ 34,401,662 40%

CA $ 83,598,726 $ 184,728,154 $ 268,326,880 31%

CO $ 6,815,467 $ 17,996,733 $ 24,812,200 27%

CT $ 8,554,006 $ 52,057,947 $ 60,611,953 14%

DC $ 2,023,055 $ 1,481,959 $ 3,505,014 58%

DE $ 1,870,439 $ 19,394,560 $ 21,264,999 9%

FL $ 79,664,174 $ 974,338,089 $ 1,054,002,263 8%

GA $ 13,822,654 $ 59,793,148 $ 73,615,802 19%

GU $ 23,475

$ 348,208



$ 371,683 6%

HI $ 3,511,428 $ 40,778,877 $ 44,290,305 8%

IA $ 9,261,662 $ 12,894,876 $ 22,156,538 42%

ID $ 1,685,637 $ 4,443,509 $ 6,129,146 28%

IL $ 15,571,396 $ 41,782,653 $ 57,354,049 27%

IN $ 9,754,263 $ 22,122,449 $ 31,876,712 31%

KS $ 5,619,810 $ 8,096,167 $ 13,715,977 41%

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

Table 1: Private Flood as a Percentage of Total Flood Written Per State in 2018

(cont'd)

State

Direct Premium

Written – Private

Direct Written

Premium – NFIP Total

Private

Flood

Percentage

KY $ 5,562,791 $ 19,859,236 $ 25,422,027 22%

LA $ 20,518,942 $ 332,451,130 $ 352,970,072 6%

MA $ 17,035,775 $ 77,215,928 $ 94,251,703 18%

MD $ 6,161,138 $ 38,179,561 $ 44,340,699 14%

ME $ 1,826,143 $ 8,778,305 $ 10,604,448 17%

MI $ 7,287,062 $ 20,395,079 $ 27,682,141 26%

MN $ 6,072,364 $ 7,828,757 $ 13,901,121 44%

MO $ 10,054,439 $ 21,828,499 $ 31,882,938 32%

MP $ 1,406 $ - $ 1,406 100%

MS $ 5,401,764 $ 43,786,173 $ 49,187,937 11%

MT $ 1,107,818 $ 3,679,000 $ 4,786,818 23%

NC $ 10,477,327 $ 109,932,602 $ 120,409,929 9%

ND $ 1,808,961 $ 6,508,148 $ 8,317,109 22%

NE $ 3,426,045 $ 8,737,796 $ 12,163,841 28%

NH $ 1,579,406 $ 8,531,507 $ 10,110,913 16%

NJ $ 33,570,528 $ 215,735,820 $ 249,306,348 13%

NM $ 2,025,523 $ 10,462,171 $ 12,487,694 16%

NV $ 4,598,626 $ 8,083,596 $ 12,682,222 36%

NY $ 47,243,273 $ 205,299,097 $ 252,542,370 19%

OH $ 15,400,298 $ 33,185,859 $ 48,586,157 32%

OK $ 3,076,462 $ 11,092,205 $ 14,168,667 22%

OR $ 6,248,012 $ 23,928,017 $ 30,176,029 21%

PA $ 22,141,354 $ 65,301,183 $ 87,442,537 25%

PR $ 21,658,142 $ 7,645,531 $ 29,303,673 74%

RI $ 2,317,465 $ 18,409,898 $ 20,727,363 11%

SC $ 13,703,417 $ 137,792,886 $ 151,496,303 9%

SD $ 834,247 $ 3,115,261 $ 3,949,508 21%

TN $ 12,179,549 $ 24,574,361 $ 36,753,910 33%

TX $ 63,221,041 $ 435,173,125 $ 498,394,166 13%

UT $ 2,712,200 $ 2,509,861 $ 5,222,061 52%

VA $ 9,475,832 $ 78,057,383 $ 87,533,215 11%

VI $ 37,329 $ 2,185,181 $ 2,222,510 2%

VT $ 698,550 $ 4,937,502 $ 5,636,052 12%

WA $ 12,061,004 $ 31,765,783 $ 43,826,787 28%

WI $ 5,896,222 $ 11,790,299 $ 17,686,521 33%

WV $ 1,804,872 $ 16,683,897 $ 18,488,769 10%

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

WY $ 899,933 $ 1,580,170 $ 2,480,103 36%

Total $ 643,879,997 $ 3,571,032,713 $ 4,214,912,710 15%

Table 2: Private Flood Growth by State from 2016 to 2018

State

Direct Premium

Written – 2018

Direct Premium

Written – 2017

Direct Premium

Written – 2016

Percentage

of Change

Premium

Written

from 2017

to 2018

Percentage

of Change

Premium

from 2016

to 2018

AK $ 726,128 $ 957,063 $ 555,129 -24% 31%

AL $ 4,717,310 $ 4,799,724 $ 3,005,135 -2% 57%

AR $ 2,918,840 $ 2,826,120 $ 1,607,656 3% 82%

AS $ 17 $ - $ - N/A N/A

AZ $ 13,616,250 $ 11,068,965 $ 6,260,448 23% 117%

CA $ 83,598,726 $ 71,951,648 $ 48,786,070 16% 71%

CO $ 6,815,467 $ 6,097,813 $ 4,735,996 12% 44%

CT $ 8,554,006 $ 9,810,824 $ 6,787,613 -13% 26%

DC $ 2,023,055 $ 2,838,882 $ 1,829,183 -29% 11%

DE $ 1,870,439 $ 1,669,426 $ 740,005 12% 153%

FL $ 79,664,174 $ 84,491,040 $ 47,796,186 -6% 67%

GA $ 13,822,654 $ 12,154,732 $ 6,953,126 14% 99%

GU $ 23,475 $ 61,491 $ 9,396 -62% 150%

HI $ 3,511,428 $ 4,707,292 $ 3,149,891 -25% 11%

IA $ 9,261,662 $ 7,973,218 $ 6,739,156 16% 37%

ID $ 1,685,637 $ 1,246,073 $ 842,501 35% 100%

IL $ 15,571,396 $ 14,022,683 $ 9,770,834 11% 59%

IN $ 9,754,263 $ 9,359,454 $ 5,834,525 4% 67%

KS $ 5,619,810 $ 5,187,276 $ 3,519,857 8% 60%

KY $ 5,562,791 $ 5,184,777 $ 3,636,333 7% 53%

LA $ 20,518,942 $ 17,883,168 $ 11,495,497 15% 78%

MA $ 17,035,775 $ 15,255,682 $ 8,980,394 12% 90%

MD $ 6,161,138 $ 4,881,020 $ 3,004,956 26% 105%

ME $ 1,826,143 $ 1,393,303 $ 1,449,308 31% 26%

MI $ 7,287,062 $ 5,784,426 $ 3,112,100 26% 134%

MN $ 6,072,364 $ 6,034,414 $ 4,382,496 1% 39%

MO $ 10,054,439 $ 8,579,964 $ 5,611,173 17% 79%

MP $ 1,406 $ 673 $ - 109% N/A

MS $ 5,401,764 $ 4,954,089 $ 3,545,564 9% 52%

MT $ 1,107,818 $ 965,222 $ 546,157 15% 103%

NC $ 10,477,327 $ 9,385,350 $ 5,916,463 12% 77%

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

Table 2: Private Flood Growth by State from 2016 to 2018 (cont'd)

State

Direct Premium

Written – 2018

Direct Premium

Written – 2017

Direct Premium

Written – 2016

Percentage

of Change

Premium

Written

from 2017

to 2018

Percentage

of Change

Premium

from 2016

to 2018

ND $ 1,808,961 $ 1,518,138 $ 1,033,168 19% 75%

NE $ 3,426,045 $ 2,733,969 $ 1,819,577 25% 88%

NH $ 1,579,406 $ 1,773,337 $ 1,516,804 -11% 4%

NJ $ 33,570,528 $ 28,862,467 $ 17,035,409 16% 97%

NM $ 2,025,523 $ 1,735,136 $ 662,921 17% 206%

NV $ 4,598,626 $ 4,574,608 $ 2,440,079 1% 88%

NY $ 47,243,273 $ 47,674,483 $ 27,419,308 -1% 72%

OH $ 15,400,298 $ 14,202,904 $ 5,628,305 8% 174%

OK $ 3,076,462 $ 3,507,498 $ 1,746,619 -12% 76%

OR $ 6,248,012 $ 4,730,473 $ 2,910,035 32% 115%

PA $ 22,141,354 $ 18,832,760 $ 13,240,946 18% 67%

PR $ 21,658,142 $ 19,554,982 $ 19,436,229 11% 11%

RI $ 2,317,465 $ 2,623,963 $ 1,286,538 -12% 80%

SC $ 13,703,417 $ 12,726,603 $ 10,633,358 8% 29%

SD $ 834,247 $ 770,092 $ 572,506 8% 46%

TN $ 12,179,549 $ 8,584,856 $ 5,939,417 42% 105%

TX $ 63,221,041 $ 53,512,832 $ 31,771,120 18% 99%

UT $ 2,712,200 $ 1,958,666 $ 1,050,341 38% 158%

VA $ 9,475,832 $ 8,527,381 $ 4,727,129 11% 100%

VI $ 37,329 $ 43,449 $ 122,459 -14% -70%

VT $ 698,550 $ 520,374 $ 297,124 34% 135%

WA $ 12,061,004 $ 11,566,163 $ 9,609,189 4% 26%

WI $ 5,896,222 $ 4,140,377 $ 2,300,499 42% 156%

WV $ 1,804,872 $ 1,986,325 $ 1,614,061 -9% 12%

WY $ 899,933 $ 959,541 $ 713,965 -6% 26%

Total $ 643,879,997 $ 589,147,189 $ 376,130,254 9% 71%

Clearly, this data suggests that there are considerable opportunities for private flood insurance

placement and market development. However, it is important to note that in 2018, the majority of growth

occurred in the private commercial flood insurance market. The residential private flood insurance

market showed a slight decline from 2017.

As insurers’ familiarity with flood catastrophe models grows, as underwriting experience develops and

as state regulatory structures evolve, the number of private flood insurance policies in force could

continue to grow, including among admitted carriers. Therefore, it is important to understand what the

states have done (or not done) to enhance this growth.

https://www.insurancejournal.com/research/app/uploads/2019/06/FINAL-Private-Flood-Insurance-Report-2019.pdf.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

STATE ACTION

During the six years of uncertainty regarding the federal banking rules for private flood insurance, a

number of states began undertaking efforts to encourage the growth of a private flood insurance market

in their state. Florida’s efforts to establish a private flood insurance market have been applauded as a

potential model to be used in other states looking to expand their residential private flood insurance

offerings. Florida has the largest flood insurance market in the country; approximately 35% of NFIP

policies are written there.

Florida has enacted legislation to create a statutory framework, allowing

private insurers to offer multiple types of flood coverage ranging from standard coverage, which mirrors

the NFIP, to other enhanced coverages. This legislation includes: 1) streamlining the rate filing process

for private flood insurers; 2) eliminating the diligent search requirement for flood policies issued by

surplus lines carriers until July 2019; and 3) providing a process by which the Office of Insurance

Regulation (OIR) will certify that a private insurer’s policy equals or exceeds coverage provided by the

NFIP. Florida’s OIR issued an informational memorandum providing guidance on how private insurers

will need to demonstrate the financial capacity to assume this risk, as well as options for developing

private flood rates and policy forms.

In addition to Florida, we can draw upon the existing experiences from other states in developing a

robust flood insurance market along the key aspects of insurance regulation.

The NAIC reached out to the states on the drafting group to provide information that was not readily

available on the states’ websites, as well as to gather information from other resources, including: 1)

the Wharton School of the University of Pennsylvania study The Emerging Private Residential Flood

Insurance Market in the United States; 2) Government Accountability Office (GAO) reports; and 3) a

recently updated Congressional Research Service (CRS) report regarding private flood insurance and

the NFIP. In the future, the NAIC might want to consider sending a more detailed questionnaire to the

states to gather more information regarding the developing private flood insurance market.

State efforts to grow a viable private flood insurance market include:

Legislative and Regulatory Changes

x Supporting private flood insurance legislation.

x Approving private flood insurance products.

x Tailoring rate and form requirements for private flood insurance coverage.

x Allowing private flood insurers to submit rates on an informational basis.

x Removing diligent search requirements.

Consumer Information

x Conducting consumer outreach.

x Listing private flood insurance products on a department of insurance’s (DOI) website.

x Collecting residential private flood insurance data.

Agent and Lender Actions

x Implementing specific continuing education (CE) requirements for producers.

x Increasing the weighting of flood insurance questions on producer licensing exams.

x Conducting agent education.

www.floods.org/ace-files/documentlibrary/committees/Insurance/Emerging_Flood_Insurance_Market_Report-Wharton-07-13-18.pdf.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

x Conducting lender education.

LEGISLATIVE AND REGULATORY CHANGES

Supporting Private Flood Insurance Legislation

In addition to Florida’s legislation, West Virginia has passed legislation requiring insurers to file their

private flood insurance plan of operation with the insurance commissioner and authorizing expedited

processing of surplus lines policies for flood insurance.

Approving Private Flood Insurance Products

Personal lines private flood insurance products are being approved by a number of states. Currently,

Alabama, California, Mississippi and Pennsylvania are among states approving new personal lines

private flood insurance products for entry into the market.

In January 2018, the Insurance Services Office (ISO) developed a new private flood insurance form,

for both personal and commercial flood insurance. The ISO forms are similar to a homeowner’s policy

form. However, the damage to the property must be caused by flooding. As of March 2018, ISO

personal flood insurance forms have been filed in 43 jurisdictions, and commercial flood insurance

forms have been filed in 45 jurisdictions. The states with independent rating bureaus are not reflected

in these numbers.

TAILORING RATE AND FORM REQUIREMENTS FOR PRIVATE FLOOD INSURANCE

COVERAGE

The states might want to consider permitting insurers to file private flood insurance products without a

prior approval requirement. For example, Florida law permits private flood insurance rates to be

implemented without prior approval at the time of filing. However, insurers are required to keep

supporting actuarial data for two years. Furthermore, Florida law allows insurers to request the state to

certify that a private policy provides flood coverage that equals or exceeds that offered by NFIP. (See

Appendix I for information on Florida’s process.)

Maryland, South Carolina and Pennsylvania have not relaxed the rate and form filing requirements.

However, they are committed to an efficient and swift overview of private flood insurance filings, and

they will work with insurers to make the filing and approval process as smooth as possible.

EXPORT LIST / WAIVING DILIGENT SEARCH REQUIREMENTS

Insurance generally must be sold in the admitted market. Only after a “diligent search” of the admitted

market is performed and coverage is denied can insurance be placed in the surplus lines market.

However, states make exceptions for those types of insurance that are known to not be available in the

admitted market. These insurance products are listed on what is known as an “Export list.” When a type

of insurance is listed on an Export list, the applicant can go straight to the surplus lines market without

the need for the diligent search, thereby obtaining coverage more easily and quickly. At least 14 states

have placed flood insurance on their “Export list,” including: Alaska, Arizona, Connecticut, Idaho,

Louisiana, New Jersey, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, West Virginia

and Wisconsin.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

Allowing Private Flood Insurers to Submit Rates on an Informational Basis

Allowing insurers to submit rates on an informational basis in states with prior approval rate filing laws

is another way to encourage the growth of the private flood insurance market. Two states that have

taken this approach include Florida and New Jersey.

(See Appendix I for information on Florida’s

process.)

CONSUMER INFORMATION

Consumer Outreach

It is important to understand that everyone lives in a flood zone. Some people live in higher-risk flood

zones than others, but we all live in a flood zone.

When people say they live or do not live in a flood zone, they typically mean what is known as a “special

flood hazard area”. A “special flood hazard area” is an area within FEMA’s 100-year flood plain. This is

where flood insurance is typically mandatory as a condition of obtaining a property loan. But there are

flood zones outside of the 100-year flood plain as well. For example, there is also what FEMA classifies

as moderate risk flood zones. These are the properties in the 500-year flood plain. By definition, and

according to FEMA, these properties have between a 0.2% and a 1% chance of flooding in any given

year. That might sound small, but over the course of a 30-year mortgage, these properties, according

to FEMA, have between a 6% and 26% chance of being inundated by a flood. And flood insurance is

not mandatory as a condition of obtaining a property loan in these moderate-risk flood zones.

Consumers need to understand that their property may still be at risk for flooding even if they do not

live in a special flood hazard area and are not required to purchase it. They also need to understand

that flood insurance can be relatively inexpensive, especially when the property is not in the highest-

risk flood zones. There are options available to them, from both the NFIP and the private flood insurance

market. And they can purchase lower limits of coverage; they do not need to insure the full replacement

cost of their home if they do not wish to do so. Purchasing just $20,000 of coverage, for example, might

go a long way in the event of a flood and may be cheaper to purchase than believed. Further, renters

can buy policies that cover only their personal property and not the dwelling that they rent.

There are also many consumers under the misconception that flood damage will be covered by their

homeowners insurance policy or rental insurance policy. Therefore, they are unaware of their actual

flood risk, and they learn that they are uninsured for this catastrophic peril only after a flood event for

which they have no coverage.

State DOIs, as well as the NAIC, are launching consumer outreach programs to help address this

coverage gap.

Some states now require a flood disclosure with homeowners policies. For example, Texas recently

passed a law requiring a conspicuous disclosure when homeowners policies do not include flood

coverage.

The NAIC Communications Department has also launched a flood campaign this year to inform

consumers of the importance of purchasing flood insurance, either private flood insurance or flood

insurance provided by the NFIP. Additionally, the NAIC recently released a special section of its website

https://riskcenter.wharton.upenn.edu/wp-content/uploads/2018/07/Emerging-Flood-Insurance-Market-Report.pdf and state DOIs.

Attachment Nine

Property and Casualty Insurance (C) Committee

12/9/19

dedicated to educating consumers about the risks of flooding and what kinds of coverage options are

available to protect against those risks.

Finally, the NAIC’s Transparency and Readability of Consumer Information (C) Working Group has

created both a basic flood insurance document and several graphic materials containing flood facts, to

be used by DOIs for consumer outreach via social media.

Listing Private Flood Insurance Writers on a DOI Website

While many DOIs include information regarding NFIP policies on their websites, some states,

including Florida, Louisiana, New Jersey and Pennsylvania, provide a list of private flood insurance

writers and their contact information on their websites.

It is worthwhile to note that surplus lines writers are generally not listed by the line of business they

write. However, it has been suggested that there would be value for the states to provide information

regarding which surplus lines writers are writing residential private flood insurance. Pennsylvania lists

the surplus lines producers placing residential flood insurance on its website.

Collecting Residential Private Flood Insurance Data

Florida and Texas both collect comprehensive data regarding residential private flood insurance.

described previously, the NAIC has been collecting private flood insurance data since the data year

2016. Before that, the private flood insurance line was not a separate entry in the annual statement.

While residential and commercial private flood insurance are not separated in the property/casualty

(P/C) annual statement blank, the NAIC, through its Property and Casualty Insurance (C) Committee,

is considering enhancements to the annual statement that would require insurers to report the

residential private flood insurance premiums and commercial private flood insurance premiums

independently. The Surplus Lines (C) Task Force is considering similar changes to alien surplus lines

private flood insurance data that is reported to the International Insurers Department (IID).

The Wholesale & Specialty Insurance Association (WSIA) is also providing the Reinsurance

Association of America (RAA) with data regarding surplus lines insurance. The RAA is working on an

open source database that provides information regarding private flood insurance.

These changes would allow state insurance regulators and FEMA to better measure the growth of the

private residential flood insurance market.

AGENT AND LENDER ACTIONS

Continuing Education and Producer Licensing Requirements

FEMA requires all insurance producers licensed in property, casualty or personal lines of authority who

sell flood insurance through the NFIP to complete a one-time course, as required by the federal Flood

Insurance Reform Act of 2004. This is also the only educational requirement in many states.

At least one state has increased the weighting of the flood insurance questions on their producer

licensing exam.

https://riskcenter.wharton.upenn.edu/wp-content/uploads/2018/07/Emerging-Flood-Insurance-Market-Report.pdf.

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Agent Education

Selling flood insurance requires an agent to understand the intricacies of NFIP and private flood

insurance policies.

When purchasing insurance, many times the insurance agent is the consumer’s first point of contact.

Therefore, it would be valuable if an agent could explain the risks of flooding, even if a consumer does

not own or rent property in a high-risk flood zone. Recent flood events remind us that where it can rain,

it can flood, and many floods occur outside of a high-risk flood zone. If agents help to educate the

consumer, it will help eliminate the cost of inaction, as the occurrence of a flood event could be

financially unbearable for homeowners or renters if they are not insured or are underinsured. It is critical

for agents to make a special effort to educate homeowners regarding the need for flood insurance,

even if a business or home is not located in a high-risk flood zone.

DOIs can provide agents with information that they have learned as a result of a flood event, and they

can foster agent education by requiring CE requirements to improve an agent’s knowledge of flood

insurance.

Other states’ adoption of such practices would likely improve agents’ knowledge of flood insurance,

therefore helping their clients to obtain more effective flood coverage, whether through the NFIP or the

private market.

Lender Education

A large percentage of Americans have a mortgage on their home. Therefore, lender education is

another opportunity for consumer flood insurance education. Recent catastrophic flooding events have

illustrated that floods can happen anywhere. Therefore, it may be in the best interest of homeowners

to purchase flood insurance even if they do not live in a high-risk flood zone.

While state insurance regulators do not have the authority to regulate lenders, lenders should still be

educated regarding the importance of flood insurance. When navigating the loan process, lenders do

not always discuss purchasing flood insurance unless the borrower’s home is in a high-risk flood zone.

A discussion about purchasing flood insurance even if the homeowner does not live in a high-risk flood

zone should ideally be addressed with the borrower.

DOIs can raise awareness regarding flood insurance by bringing agents, consumers, lenders, FEMA,

private flood insurance writers, etc. together in communities to discuss the importance of a homeowner

purchasing flood insurance.

MARKET UNCERTAINTY AND THE DEVELOPMENT OF A PRIVATE FLOOD INSURANCE

MARKET

The May 2019 CRS report, “Private Flood Insurance and the National Flood Insurance Program,”

identified some of the barriers to the development of a private flood insurance market. Some of the

barriers identified in the report include: 1) regulatory uncertainty; and 2) continuous coverage.

Most directly relevant for the NAIC members is the notion of regulatory uncertainty, which is covered

below. The remaining topics will be addressed in Appendix II.

www.floods.org/ace-files/documentlibrary/committees /Insurance/Emerging_Flood_Insurance_Market_Report-Wharton-07-13-18.pdf.

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In 2016, the U.S. experienced several major flood catastrophes, causing billions of dollars in property

losses.

Following these storms, it was found that somewhere between 50% and 80% of these losses

were not insured, which implies that communities are unable to bounce back quickly following large

catastrophic events.

Floods are expected to cost U.S. households $20 billion each year

. An Insurance Information Institute

(I.I.I.) survey indicated that 15% of American homeowners had a flood insurance policy in 2018

and

that there were approximately 5.18 million flood insurance policies held by the NFIP.

Milliman

estimates the potential private residential flood insurance market to represent between $34 billion and

$48 billion in direct written premium.

This data clearly indicates an opportunity for growth in the

residential private flood insurance market in the U.S.

Recently, comments have surfaced regarding the possibility of the residential private flood insurance

market cherry-picking their risks. It is important to remember the NFIP was meant to be a temporary

solution that was put into place 50 years ago due to private insurers not insuring flood. While the NFIP

is important, every state has some type of residual market that aids in insuring and providing insurance

coverage for those who are unable to obtain insurance coverage available in the market. While not

directly related to flood insurance, two good examples of successful residual markets are Florida

Citizens and Louisiana Citizens. As the market has grown and shrunk in both Florida and Louisiana,

both Florida Citizens and Louisiana Citizens needed to and provided a safe and reliable source of

insurance for consumers. The NFIP can continue to evolve and do the same thing. Milliman believes

Risk Rating 2.0 will help the NFIP and provide helpful information regarding the actual risk of a flood

insurance policy; however, it was recently announced that the implementation of Risk Rating 2.0 will

be delayed until Oct. 1, 2021 to allow for more analysis of its impact.

Milliman is of the opinion that a private market can coexist alongside the NFIP. Private flood insurance

can be written in the admitted and non-admitted market. However, it needs to be determined if the

guaranty funds will cover flood insurance in the admitted market, as flood may be excluded in many

states.

Many private insurers have not serviced or written flood insurance policies. Additionally, private insurers

do not have access to historical data; this poses a problem. It will be important to balance the need to

protect consumers against the need to promote the private flood insurance market.

New entrants to the private flood insurance market are likely to purchase significant amounts of

reinsurance. Flood insurance is inherently high-risk and volatile, so insurers may require higher

amounts of profit and contingencies built into rates than for a typical homeowner’s insurance product.

States allowing these options might make it easier for an insurer to offer private flood insurance. For

example, Wisconsin has no limitations or requirements for reinsurance cost and profit provision

assumptions.

The issue of continuous coverage is problematic. In order for an NFIP policyholder to preserve any

subsidies provided by the NFIP, a policyholder is required to have continuous flood insurance coverage.

Currently, a policyholder loses subsidies or cross-subsidies when private flood insurance is purchased,

if the policyholder chooses to return to the NFIP.

https://www.pewtrusts.org/en/research-and-analysis/articles/2017/02/01/flooding-disasters-cost-billions-in-2016

Milliman

https://www.iii.org/fact-statistic/facts-statistics-flood-insurance

https://www.fema.gov/total-policies-force-calendar-year

Milliman

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Unless there is legislation in place allowing private flood insurance to be deemed as continuous

coverage, homeowners may be averse to purchasing private flood insurance. Homeowners do not want

to find themselves in a situation causing them to lose their subsidy should they elect to return to the

NFIP for flood insurance coverage. While legislation has been introduced in the U.S. House of

Representatives allowing private flood insurance to count towards continuous coverage, legislation has

yet to be passed.

The availability of private flood insurance provides the added benefit of increasing consumer choice.

As private insurers are entering the flood insurance market, some of the policies offered are providing

broader coverage than that provided by the NFIP. Additionally, some policyholders are finding private

flood insurance policies to be less expensive than those offered by the NFIP.

SUMMARY

In the past few years, many states have experienced catastrophic flooding. Following the flood events,

it has become even more apparent that a significant number of consumers are either uninsured or

underinsured for the flood peril.

While the NFIP still writes a majority of the residential flood insurance policies, there are considerable

opportunities for the development of the residential private flood insurance market.

This document provides details about how a few states have put procedures in place to enhance the

private flood insurance market in a state. These procedures include: 1) supporting private flood

insurance legislation and initiatives; 2) tailoring rate and form requirements for residential private flood

insurance products; and 3) consumer, agent and lender education.

It is noteworthy to say that the states experiencing large flooding events have seen growth in the private

flood insurance market regardless of any other actions. For example, following Hurricane Harvey,

Texas saw growth in its residential private flood insurance market. Catastrophic events are a reminder

to consumers of the devastation caused by flooding.

While there are several barriers for the residential private flood insurance market, the most significant

barrier for private insurers may be uncertainty about the state regulatory environment.

To avoid unintended consequences policymakers interested in facilitating a private flood insurance

market should familiarize themselves with the requirements for residential customers with a federally

backed mortgage to purchase flood insurance coverage and with the existing private insurance markets

that provide coverage for flood damage, including coverage provided under: (a) commercial policies,

(b) residential policies providing coverage in excess of required flood insurance coverage limits, (c)

residential policies for those not mandated to purchase flood insurance, and (d) comprehensive auto

coverages. With such knowledge, legislative and regulatory changes can be tailored to accomplish the

policy objectives without adversely impacting existing flood insurance markets.

The attached appendices discuss steps that Florida has taken in its approach to cultivate the private

esidential flood insurance market and discussion of other barriers to the entrance of residential private

flood insurers.

Congressional Research Service report, “Private Flood Insurance and the National Flood Insurance Program, May 7, 2019

Attachment Nine

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Appendix I – Actions Florida Has Taken

FLORIDA’S FORM FILING PROCESS EXAMPLE

Florida reviews form filings, providing flood coverage differently based on the type of flood coverage being

provided.

Subject to the Requirements of Florida’s Flood Statute

The coverage provided under the policy must meet one of the definitions of type of flood coverage, as defined

by S. 627.715, F.S. Of the five defined types, "standard," "preferred" and "customized" are defined to meet or

exceed the coverage provided by the standard NFIP policy. "Flexible" flood insurance must cover losses from

the peril of "flood" as defined by the statute, but it does not have to provide coverage comparable to the entire

NFIP policy. "Supplemental" flood coverage is meant to supplement an NFIP or private flood policy. Policies that

fall under these definitions may have certain provisions that differ from that which would otherwise be required if

not written under the flood statute.

Items Not Subject to the Requirements of Florida’s Flood Statute

The coverage does not have to meet or exceed the coverage provided by the standard NFIP policy. However,

the provisions of the flood statute that allow changes to the form and rate requirements, as well as allowing for

a certification provided by the Florida OIR, do not apply. This means that forms and rates would be subject to all

the requirements of Florida law, and the coverage does not have to meet the definition of "flood" under the

statute.

REVIEW OF FLORIDA’S FORM FILING PROCESS

How the Florida OIR Reviews Form Filings Subject to its Flood Statute

The Florida OIR coordinates with FEMA about training to educate forms analysts about the details and

nuances of a federal NFIP policy. Forms analysts:

x Review the policy or endorsement and compare it to the NFIP policy.

x Review the provisions of the underlying policy that are not superseded by changes made in the

endorsement.

x Make sure that the flood coverage in total (including definitions, deductibles, limits, conditions,

property not covered, exclusions, etc.) are as broad as that provided under the NFIP policy.

x Exclude provisions, specific to the NFIP, that would not make sense to be in a private company’s

policy.

State Law Conflict

There are certain provisions in the federal private flood definition that may conflict with a state’s law.

For example, the statute of limitations under the standard NFIP policy is one year after the date of

denial. In Florida, the statute of limitations for most claims is five years from the date of loss. The insurer

could use the standard NFIP provision, or the insurer could use a provision such as one year after the

date of denial of a claim or five years from the date of the loss, whichever is greater. The modified

provision would be considered as providing better coverage.

Florida’s private flood insurance statute, S. 627.715 F.S., does not apply to the commercial

lines market. Forms providing commercial flood coverage must comply with all applicable

Florida laws.

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Another potential area in which there could be conflict between the standard NFIP policy and state law

is the requirement for notice of cancellation. The NFIP requires 45 days, which may be more or less

than state provisions.

In Florida, to comply with the flood statute or other than Flexible or Supplement flood insurance, the

insurer would have to give at least 45 days notice.

FLORIDA RATE PROCESS EXAMPLE

Florida allows insurers to offer personal residential flood insurance coverage that meets the requirements of the

flood statute. Insurers may decide to either submit the rate filings subject to the normal filing requirements of

review and approval or (until Oct. 1, 2025) submit the filing for informational purposes.

Personal residential flood insurance rates submitted for informational purposes are subject to examination by

the Florida OIR for a period of two years from the effective date to determine if the rates are excessive,

inadequate or unfairly discriminatory.

If the coverage does not meet the requirements of the “flood statute,” the rate filing is subject to the normal filing

requirements of review and approval. Commercial non-residential property rates (including that for flood

coverage) are informational due to a separate provision of Florida laws, and they are an exception to these filing

requirements.

FLORIDA FLOOD STATUTE – FLOOD POLICY TYPES

Florida’s flood statute (S. 627.715, F.S.) sets up five types of flood coverage that may be written using the special

deviations allowed for flood insurance.

x Standard flood insurance (equivalent to coverage provided under the standard flood policy under the NFIP).

x Preferred flood insurance.

x Customized flood insurance.

x Flexible flood insurance.

x Supplemental flood insurance.

Flexible and supplemental coverage are the only flood coverage types under the statute that do not require flood

insurance coverage to meet or exceed what is provided under the standard NIFP policy. Flexible coverage must

provide coverage for the peril of flood as defined by the statute (which mirrors that of the NFIP). However, there

are ancillary coverages that are not required to be provided.

The general filing requirement for forms is found in S. 627.410, F.S., which requires the

Florida OIR to approve forms before use.

For commercial flood coverage, the insurer has the option to file the forms as informational

pursuant to S. 627.4102, F.S.

The general filing requirement for forms is found in S. 627.410, F.S., which requires the

Florida OIR to approve forms before use.

For commercial flood coverage, the insurer has the option to file the forms as informational

pursuant to S. 627.4102, F.S.

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APPENDIX II – BARRIERS TO THE RESIDENTIAL PRIVATE FLOOD INSURANCE MARKET

Flood Coverage Being “At Least as Broad as” the NFIP

Biggert-Waters specifies that private flood insurance satisfies the mandatory purchase mortgage

requirement when a private flood insurance policy affords coverage that is “at least as broad as” the

coverage offered by an NFIP flood insurance policy.

Since there was not a federal banking rule in place regarding private flood insurance following the

passage of Biggert-Waters, it was challenging to implement the use of private flood insurance for the

mandatory purchase mortgage requirement. Some lending institutions thought that they did not have

the knowledge necessary to assess whether a flood insurance policy met the definition of private flood

insurance set forth in Biggert-Waters.

The federal banking rule became effective July 1, 2019. The rule fulfills the condition in Biggert-Waters

that regulated lending institutions accept private flood insurance policies satisfying the conditions

specified in the Act. Furthermore, the federal banking rule allows lending institutions to accept an

insurer’s written assurances stated in a private flood insurance policy that the appropriate criteria is

met. The rule also permits lending institutions to accept some flood insurance coverage plans provided

by mutual aid societies.

Theoretically, the federal banking rule removes the acceptance of private flood insurance as a barrier

to the private flood insurance market. However, educating the banking industry is clearly still needed

as state insurance regulators are still hearing that lenders are telling borrowers that the only flood

insurance policy that is acceptable is an NFIP flood policy. Thus, further education regarding the federal

banking rule needs to be done. States may want to consider drafting a bulletin that can be used for

these purposes.

Lenders may accept private flood insurance that meets the “discretionary acceptance” definition, which

states that lending institutions may accept private flood insurance policies that do not meet the

“mandatory acceptance” requirements, provided that certain conditions are met, such as that the policy

provides sufficient protection of the loan, consistent with general safety and soundness principles.

This distinction may be important for insurers with a product designed with higher-deductible options

and/or a shorter cancellation notice for nonpayment of premiums.

Finally, many property owners are not required to purchase flood insurance because their home is

outside of a Special Flood Hazard Area (SFHA) or because they do not have a federally backed

mortgage. As a result, any flood insurance policy covering such properties is not required to be as

broad as the NFIP policy.

Continuous Coverage

If an NFIP policy holder lets an NFIP policy lapse, by either not paying premium or going to a private

flood insurer, any subsidy the NFIP policy holder would have received is immediately eliminated.

Legislation currently being considered by Congress to reauthorize the NFIP includes the ability of

policyholders to leave the NFIP in order to purchase a private flood insurance policy and then return to

the NFIP without penalty.

42 U.S.C §4012a(b).

Ibid

As required by §100205(a)(1)(B) of Biggert-Waters (P.L. 112-141, 126 Stat. 917), only for NFIP policies that lapsed in coverage as a result of the

deliberate choice of the policyholder.

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Non-Compete Clause

FEMA dropped its non-compete clause in 2018. FEMA now allows Write Your Own (WYO) companies

to sell NFIP policies. Therefore, this is no longer a barrier.

NFIP Subsidized Rates

One of the hurdles facing private flood insurance growth involves the NFIP’s subsidized rates, as NFIP

premiums do not always reflect the full risk of flooding. NFIP rates allow certain policyholders to have

more affordable premiums. Additionally, NFIP rates do not incorporate profit, which is an important

element for private flood insurers.

Private flood insurers need to charge rates that represent the full

risk of the peril.

If the NFIP were to reform its rate structure to collect full-risk rates, it might result in the encouragement

of more private insurers to write policies in the private flood insurance market. Full-risk NFIP rates

would fall closer to what a private insurer would charge. It is important to note that full-risk rates would

likely lead to higher rates than those that currently exist.

Presently, FEMA is in the process of redesigning its rating system. The new NFIP rating system will be

known as Risk Rating 2.0. This new rating structure will add replacement cost value and consider the

distance between a property and a source of water. Additionally, Risk Rating 2.0 takes into

consideration things that are not reflected in the current rating structure, such as intense rainfall.

stated previously it was recently announced that Risk Rating 2.0 will be delayed until Oct. 1, 2021 to

allow for more analysis on its impact.

Ability to Assess Flood Risk Accurately

On June 11, 2019, the NFIP released data on flood losses and claims. Prior to the release of this data,

insurers viewed the lack of access to NFIP data on flood losses and claims as a barrier for private

companies offering flood insurance.

For private flood insurers to manage and diversify their risk exposure, consumer participation to

manage and diversify their risk exposure is required. Many private insurers have expressed the view

that broader participation in the flood insurance market would be necessary to address adverse

selection and maintain a sufficiently large risk pool.

An established goal of the NFIP is to increase the number of flood insurance policies in force. Even

though there is a mandatory purchase requirement for homeowners to purchase flood insurance in

certain flood zones, this does not always occur.

As more insurers begin to write private flood insurance, it is likely that consumers will be offered more

choices. Private flood insurers may also offer coverages not available through the NFIP. These

coverages might include coverage such as basement coverage, business interruption, additional living

expenses, etc. Private insurers might also be able to offer higher coverage limits than those offered by

the NFIP.

www.floods.org/ace-files/documentlibrary/committees/Insurance/Emerging_Flood_Insurance_Market_Report-Wharton-07-13-18.pdf.

Ibid.

GAO, Jan. 22, 2014. “Flood Insurance: Strategies for Increasing Private Sector Involvement,” 14–127, accessed online at

https://www.gao.gov/products/GAO-14-127.

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Private flood insurance offered as an endorsement to a standard homeowners insurance policy could

possibly eliminate instances where it is necessary to differentiate between flood and wind damage.

CRS, May 7, 2019. “Private Flood Insurance and the National Flood Insurance Program,” accessed online at

https://www.everycrsreport.com/files/20190507_

R45242_968aced5ccda33b36e57f26022e80552ffa6f32d.pdf

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