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Regulations issued by a handful of federal lending regulators could help smooth the way for further development of private market flood insurance, according to industry experts.
The Office of the Comptroller of the Currency, Treasury; The Board of Governors of the Federal Reserve System; The Federal Deposit Insurance Corp.; The Farm Credit Administration; and the National Credit Union Administration jointly issued regulations Jan 24 related to loans in areas having special flood hazards.
The regulations, set to become effective July 1, address provisions in the Biggert-Waters Flood Insurance Reform Act of 2012 related to mortgage lenders acceptance of private market flood insurance in obtaining a loan, as opposed to coverage from the National Flood Insurance Program, the federally-backed program.
“Specifically, the final rule requires regulated lending institutions to accept policies that meet the statutory definition of ‘private flood insurance’ in the Biggert-Waters Act; and permits regulated lending institutions to exercise their discretion to accept flood insurance policies issued by private insurers and plans providing flood coverage issued by mutual aid societies that do not meet the statutory definition of ‘private flood insurance,’ subject to certain restrictions,” the regulations state.
“Lending regulators have finally come up with a rule on Biggert-Waters six years after it was passed,” said Craig Poulton, CEO of Salt Lake City-based Poulton Associates LLC, the underwriting manager and administrator of private flood insurer Natural Catastrophe Insurance Program.
The regulators first proposed a set of regulations in October 2013.
Proponents of a commercial market for flood insurance apart from the federal NFIP regime see the move to implement regulations as positive for private flood coverage.
“We do think the regulation is a step” toward helping support the continued development of a private flood insurance market, said John Dickson, president of Aon Edge in Kalispell, Montana. “I think (the regulations) are absolutely a step in the right direction,” Mr. Dickson said.
“SmarterSafer views the final rule as a really positive development for making sure the consumer has choice and that a private flood market can become stronger in the U.S.,” said Jenn Fogel-Bublick, spokeswoman for the Washington-based consumer advocacy group.
The regulations should provide greater certainty to both lenders and consumers in securing flood insurance when seeking a mortgage loan.
“One of the things this does first and foremost is provide clarity around lender acceptance of flood insurance,” Mr. Dickson said. “With the regulation taking effect July 1, that process to determining acceptability is somewhat standardized. It will be easier for agents and consumers to shop and compare programs.”
The lack of regulations previously led to a fragmented market approach, according to Mr. Dickson.
The Biggert-Waters act included language concerning lender acceptance of private flood insurance, but banks, lenders and mortgage servicers were left to interpret that language, he said. “What happened was, different institutions took different constructions.”
Now there is “a better understanding across the marketplace of what is and what is not acceptable insurance,” Mr. Dickson said.
“What they have published is probably workable for most private flood insurance that will be tendered to lenders for acceptance in lieu of NFIP flood insurance,” Mr. Poulton said. “It’s probably workable depending on how it’s implemented.”
“I think we’re really going to be focused on implementation,” Ms. Fogel-Bublick said, and making sure lenders are comfortable accepting private flood insurance policies.
Succinct guidance from the regulators will also be an important component of implementation, he said.
“The next step is to see how they implement this,” Mr. Poulton said. “It’s my hope they will provide some very reasonable and limited guidance,” as too much direction could burden and slow lenders’ progress.
For example, the October 2013 proposal drew 51 comments related to private flood insurance during the public comment period, including many that requested more guidance regarding the statutory definition of private flood insurance, according to a summary of the proposed regulations. Most commenters also supported a provision specifically permitting the discretionary acceptance of flood insurance issued by private insurers, but some commenters raised concerns about including prescriptive criteria in the discretionary acceptance provision, noting that private flood insurance policies “vary based on the nature of the property and the needs and financial capability of the borrower.”
The regulations should provide a path forward for private flood insurers and consumers alike, Mr. Poulton said.
“Once the rule is implemented it has the potential to be a victory for flood insurance consumers,” and could further enable the private flood insurance sector, Mr. Poulton said.
Private flood insurance may be drawing more attention as flooding has frequented headlines.
Hurricanes Harvey, Irma and Maria caused tens of billions of dollars in damages in 2017, according to catastrophe modelers.
Events, with floods among the catastrophes of 2017 and 2018, are “very important in setting market trends,” Mr. Dickson said.
The extent of the insured damage caused by Hurricane Florence is still unclear, but some experts are drawing parallels to Hurricane Harvey because, like that storm, Florence is a multiday rainfall event, while others caution against such comparisons.