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National Flood Insurance Program drops noncompete provisions

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The Federal Emergency Management Agency is changing provisions that prevented private insurers who sell National Flood Insurance Program policies from also offering their own products and prevented buyers from cancelling NFIP policies in favor of potentially more cost-effective private policies — moves that experts say could expand private sector participation in the flood insurance market.

Under the NFIP’s Write-Your-Own program, private insurers are paid to write and service NFIP flood policies themselves. Roughly 86% of NFIP policies are sold by the private insurers participating in the program. But very few private insurers compete with the NFIP in the primary voluntary flood insurance market partly because of the noncompete clause — a contractual restriction placed on WYO insurers against offering stand-alone private flood products that compete with the NFIP that curtailed the potential involvement of the WYO companies, according to a July report from the Congressional Research Service.

FEMA has decided to remove restrictions on WYO companies choosing to offer private flood insurance, while maintaining requirements that such private insurance remain entirely separate from a WYO company’s NFIP insurance business, effectively removing the noncompete clause without a legislative change — a change that took effect on Monday.

“It’s going to take time for these policy changes to bleed into the system, but they’re a huge step forward,” said John Dickson, president of Aon Edge in Kalispell, Montana, which sells flood insurance policies. “The private capital will be able to create solutions that they might be limited from doing today by removing the noncompete” clause.

Beginning Monday, FEMA also established cancellation reason code 26, which will allow cancellation of an NFIP policy when a policyholder has obtained a duplicate policy from sources other than the NFIP and allow them to get a prorated refund. The non-NFIP insurance coverage must be for building coverage on the same building insured by the flood policy being canceled, according to a March memo issued by FEMA.

Prior to the change, a policyholder could only switch policies at renewal, so “even if you found a better policy in the private market, you were stuck,” said Jim Cirillo, national director, community associations for CBIZ Insurance Services Inc. based in Sarasota, Florida. The new cancellation code is “very big for the viability of the private market eventually taking over a lot of the risk exposure that’s out there with the NFIP.”

The NFIP changes are “mostly no-brainers,” said Craig Poulton, CEO of Salt Lake City-based Poulton Associates Inc., the underwriting manager and administrator of the Natural Catastrophe Insurance Program, a private flood insurer. “The removal of the noncompete is significant.”

Policyholders would have more coverage options from private insurers, including potential business interruption coverage, which is not available from the NFIP, according to some experts.

“If you’re a business and you buy an NFIP policy and you can’t get BI, why buy it,” Mr. Poulton said.

But Joe Jonas, Chicago-based director of wholesale and consulting at Insureon, which focuses on providing insurance solutions to small and medium-size entities, cautioned buyers considering cancelling NFIP policies in favor of less expensive options in the private market to compare every element of these policies and check if the private insurers are, for example, offering the same limits as well as the rating of the private insurers.

“Cheaper doesn’t always mean better,” he said.

Other changes are in store for the program come Jan. 1, 2019, including rate increases for pre-FIRM buildings — those for which construction or substantial improvement occurred on or before Dec. 31, 1974, or before the effective date of an initial Flood Insurance Rate Map — which have been allowed to have lower premiums than what would be expected to cover predicted claims, according to the Congressional Research Service report. But these subsidies are being phased out, with FEMA increasing rates on certain properties, including severe repetitive loss properties and those with substantial cumulative damage, at 25% per year until full-risk rates are reached. As of September 2016, about 16.1% of NFIP policies received a pre-FIRM subsidy.

FEMA is “trying to get to more actuarial sound rates,” Mr. Cirillo said. “There’s no magic formula. There’s no magic underwriting rule or way they underwrite these risks to suddenly make the program viable.”

“At 25%, that’s a pretty hefty increase,” he added. “That shows just how far behind the 8-ball the NFIP rates have been.”

Private sector role growing

All these changes are seen as part of FEMA’s efforts to expand the role of the private sector in covering flood risk, including the agency’s use of the capital markets to access reinsurance cover via a three-year, $500 million catastrophe bond announced in July.

FEMA also increased its one-year reinsurance placement to $1.46 billion from 28 reinsurance companies from $1.042 billion of traditional reinsurance coverage from 25 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event — a reinsurance agreement finalized after FEMA submitted a $1.042 billion full-limit claim to reinsurers for Hurricane Harvey losses.

“That was really useful for everyone involved from the standpoint of understanding the mechanics of how losses get paid in the reinsurance market,” Joseph Monaghan, Chicago-based executive managing director with Aon Benfield, said, adding that the 21-day recovery and subsequent agreement on a new placement demonstrated that reinsurers still had an appetite for the risk despite the full limit claim and FEMA’s commitment to reinsurance as a part of its overall risk management strategy and capital diversification.

“Reinsurers want the risk,” he said. “They’re excited about the program over the long run. To the extent that FEMA or others wanted to buy more flood protection, reinsurers and other investors would welcome that opportunity.”

“The NFIP is not throwing up their hands,” Mr. Dickson said. “FEMA is not saying, ‘We’re stuck, there’s nothing we can do until Congress acts.’ It’s impressive. They’ve said, ‘We’d love to have comprehensive reauthorization. We’d love to have Congressional reforms that provide direct guidance for the future of the program. But while that process is working itself out, we’re not just going to sit on our hands and wait.’”

Experts say they are not optimistic about the prospect of a more substantive overhaul of the NFIP ahead of the midterm elections despite the Nov. 30 scheduled program expiration.

“There’s just not enough hours in the day for this,” Mr. Dickson said. “I think the most likely outcome is they move the date again and give themselves some time to come up with some comprehensive reforms.”