WASHINGTON, June 8 — The Home Monetary Providers Subcommittee on Housing, Neighborhood Growth and Insurance coverage issued the next testimony by Ariel Rivera-Miranda, company principal of the Deer Insurance coverage Company, on behalf of the Nationwide Affiliation of Skilled Insurance coverage Brokers, involving a hybrid listening to on Might 25, 2022, entitled “Reauthorization and Reform of the Nationwide Flood Insurance coverage Program”:
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My title is Ariel Rivera-Miranda, and I’m the founder and company principal of Deer Insurance coverage Company, which is an impartial insurance coverage company situated in Jacksonville, FL.
I used to be born and raised in San Juan, Puerto Rico and have over 18 years of expertise within the insurance coverage trade. I’ve been an impartial insurance coverage company proprietor since I started my skilled profession, and I’ve based and operated insurance coverage businesses in Puerto Rico and Florida. In my present capability, I promote flood insurance coverage merchandise by means of each the Nationwide Flood Insurance coverage Program and within the non-public market, and I’m at the moment the Secretary of the Nationwide Affiliation of Skilled Insurance coverage Brokers (PIA).
Based in 1931, PIA is a nationwide commerce affiliation that represents impartial insurance coverage businesses and their workers. Our members promote and repair every kind of insurance coverage, however we specialize largely in Property & Casualty insurance coverage. We symbolize impartial insurance coverage brokers in all 50 states, Puerto Rico, and the District of Columbia.
We strongly supported the Home Monetary Providers Committee reauthorization payments that unanimously handed out of the committee in 2019, and we stay supportive of many provisions of the dialogue drafts listed for as we speak’s listening to.
I. Background
The Nationwide Flood Insurance coverage Program (NFIP) was created in 1968 to supply property homeowners within the U.S. with flood insurance coverage protection for his or her houses. On the time, the non-public insurance coverage market considered flood as an uninsurable threat, and, consequently, flood insurance coverage merchandise bought by means of the non-public market have been cost-prohibitive or unavailable. Within the many years since its inception, the NFIP has remained the first supply for flood insurance coverage merchandise.
The Federal Emergency Administration Company (FEMA) administers the NFIP, and, over the previous a number of years, FEMA has been updating the NFIP’s threat score course of utilizing a technique often called Threat Score (RR) 2.0. We strongly help this new score system, which calculates premium charges utilizing considerably extra granular information to align charges extra carefully with every property’s precise stage of flood threat. The usage of RR 2.Zero is a chance for the NFIP to realize solvency whereas additionally offering policyholders with extra correct, detailed details about their property’s flood threat. With higher info accessible to them, we hope policyholders and potential policyholders can be inspired to be taught extra about their property’s flood threat, interact in mitigation efforts the place wanted, and, in the end, buy flood insurance coverage that matches their threat.
A protracted-term reauthorization of the NFIP is essential to this system’s longevity as a result of the NFIP continues to supply crucial help to all flood-prone areas. We help the expansion of the non-public marketplace for flood insurance coverage merchandise, however non-public flood insurance coverage isn’t accessible nationwide and is typically unavailable within the areas the place it’s wanted most.
II. Important Position of the Unbiased Agent The NFIP is a public-private partnership between the federal authorities and insurance coverage firms, that are known as “Write-Your-Personal” (WYO) carriers. The federal authorities enters right into a contract with every WYO promoting NFIP merchandise, and every WYO makes use of insurance coverage brokers to promote these merchandise to customers. Unbiased brokers have separate contracts with every WYO whose NFIP insurance policies they promote.
Unbiased insurance coverage brokers usually function the primary level of contact for a possible client inquiring about flood insurance coverage, and so they symbolize potential policyholders as they navigate this difficult program. Brokers are important assets for property homeowners attempting to make educated decisions in regards to the want for and buy of flood insurance coverage insurance policies for his or her houses and companies. Most of the time, brokers additionally obtain the primary name policyholders make after a flood loss.
Buying an NFIP coverage is a tough course of for customers; it requires assistance from brokers with specialised information, particularly now that every one insurance policies are topic to the brand new RR 2.Zero methodology. Moreover, even earlier than the RR 2.Zero transition, the flood coverage buying course of was very totally different from and extra complicated than that of an ordinary householders’ or auto coverage; that continues to be true as we speak. Promoting flood insurance coverage calls for much more effort from brokers than promoting different insurance coverage merchandise. With the non-public market rising, and state statutory and regulatory oversight of the non-public market evolving on a regular basis, brokers should evaluate the NFIP to the non-public marketplace for eligibility, protection choices, and pricing; inform policyholders and prospects of their outcomes; and supply choices if accessible.
To successfully serve their clients, brokers should stay updated on ever-changing legal guidelines and rules governing flood insurance coverage protection necessities, and, traditionally, they’ve additionally needed to preserve tempo with the fixed evolution of relevant floodplain maps, flood zones, specialised terminology, and related group participation. Within the present RR 2.Zero surroundings, they’re additionally tasked with gathering dozens of knowledge factors about every of the properties they cowl to supply the RR 2.Zero score engine with a whole image of the property they’re insuring.
At renewal time, brokers overview notices for accuracy (title[s] of insured[s], mailing handle, location of insured property, scope of protection, and identification of any liens and lienholders); analysis authorized modifications that might have an effect on protection or premium charges and the existence of different insurance policies that might trigger a spot in protection; get hold of and enter the brand new information factors required by RR 2.0; and, in the course of the first six months RR 2.Zero was in use, decide when every coverage was eligible for renewal into the RR 2.Zero system. Brokers work with policyholders to make sure renewal funds are obtained in a well timed manner, sends policyholders reminders because the expiration date approaches, and warns of cancellation for nonpayment of a coverage for which renewal is meant.
Maybe most significantly for customers, impartial brokers help their purchasers after a flooding occasion, even when that occasion additionally impacts the brokers’ personal houses and companies. As soon as a flood happens, businesses typically make customer support representatives accessible almost across the clock in shifts. Businesses will generally rent further employees to help in navigating the difficult claims course of. Typically, the whole company employees has itself been affected by the flood from which their purchasers are recovering; nevertheless, they acknowledge their accountability to place their purchasers first. As a result of floods continuously injury a complete neighborhood or group without delay, an agent often doesn’t have the posh of dealing with only one declare arising from one flood; quite, a single agent or company could possibly be dealing with many claims, all arising from a single flood.
Over the previous 12 months, brokers have additionally been fielding fixed questions from lenders, builders, group floodplain managers, realtors, and purchasers in regards to the impact RR 2.Zero would have on totally different points of this system. However with out a clear understanding of how every score issue works, brokers can’t reply these questions. The flood insurance coverage program has at all times been a posh program with a steep studying curve, however RR 2.Zero has exacerbated it and generally positioned brokers within the uncomfortable place of being unable to reply the inquiries of customers and others. The workload of impartial brokers across the nation elevated exponentially as soon as FEMA introduced its bifurcated transition plan, and the graceful implementation of RR 2.Zero has required large effort.
Unbiased brokers’ companies, like these of many salespeople, are constructed on their reputations. They use their ability and expertise to reply purchasers’ questions and alleviate their issues. Brokers have spent the previous 12 months investing time, cash, and manpower to familiarize themselves and their workers with a totally new score methodology, however they typically face a ubiquitous but unanswerable query: Why did my charge improve a lot?
III. Threat Score 2.0
We strongly help RR 2.Zero as a result of it would make the NFIP extra solvent whereas additionally offering policyholders with extra correct details about their properties’ flood threat. With higher info, we hope property homeowners will be taught extra about their threat of flood, interact in mitigation efforts the place wanted, and, in the end, buy flood insurance coverage that matches their threat.
Furthermore, we help the continued use of statutory caps, to supply customers with a gradual development towards actuarially sound charges. Threat-based charges are important for stabilizing the NFIP financially, however their gradual implementation is vital and ought to be accompanied by clear and frequent communication.
a. Implementation
Final October, FEMA started the primary section of RR 2.0’s two-part deployment course of. RR 2.Zero was carried out for all new insurance policies and a few current insurance policies in the course of the first section. Particularly, current insurance policies whose renewal dates have been between Oct. 1, 2021 and March 31, 2022 gained entry to the RR 2.Zero pricing system throughout that renewal (and thus earlier than policyholders whose renewal dates occurred exterior that time-frame), if doing so could be financially advantageous to the policyholder–that is, if the RR 2.Zero methodology produced a decrease premium than the legacy methodology did. Current policyholders whose insurance policies have been up for renewal throughout that point have been permitted to resume utilizing the legacy methodology if shifting to RR 2.Zero charge would have resulted in a premium improve.
FEMA’s option to bifurcate of the implementation course of intensified the burden already being positioned on impartial brokers, which embrace small enterprise homeowners who, in some instances, have solely a handful of workers. Splitting the method into two phases for renewing properties had a number of unintended penalties: first, the attendant media consideration prompted policyholders across the nation to contact their brokers with inquiries about their eligibility for a decrease charge through the brand new score system. At the moment, brokers had no manner of figuring out the eligible insurance policies inside their books of enterprise, so that they have been unable to reply their purchasers’ questions. Certainly, brokers solely obtained entry to the score engine a couple of month earlier than it went dwell. Consequently, many employed extra employees to comb by means of their insurance policies and determine purchasers eligible for RR 2.Zero renewal throughout this primary section.
This previous April, FEMA carried out the second section, which rendered all insurance policies topic to RR 2.0, no matter whether or not the legacy methodology would have produced a decrease charge. At the moment, the final of the insurance policies nonetheless utilizing the legacy score technique will renew on March 31, 2023. From that time ahead, all insurance policies can be topic to RR 2.0, no matter its impact on their charges.
b. Affordability and Transparency
As impartial brokers have gained expertise with RR 2.0, we’ve seen that we want extra info from FEMA about how the brand new score components are weighed and mixed to provide a single property’s RR 2.Zero charge. The FEMA web site consists of quite a few Excel spreadsheets designed to be cross-referenced with each other to know how a single charge is constructed, however the calculation course of is unclear even to probably the most seasoned flood brokers, significantly when in comparison with their experiences utilizing the legacy methodology.
On daily basis, everywhere in the nation, brokers start the method of renewing a coverage into RR 2.Zero by getting into the required datapoints into the brand new score engine. Typically, primarily based on our years of expertise, and our rising expertise working with RR 2.0, we anticipate the system to provide a charge inside a sure vary. Typically our expectations are met, however, in lots of instances, we’re shocked on the quotes returned by the system. Shoppers we anticipated would expertise charge will increase don’t, whereas these we anticipated to learn from it don’t.
Brokers have found that the legacy score system credited customers for mitigation measures in a manner that the brand new system doesn’t. Shoppers who invested in mitigation as a result of they anticipated it to pay for itself in premium reductions are studying that, in some instances, they might want to personal their house for one more decade or extra earlier than their funding pays off–if it ever does. An unintended consequence is that customers contemplating whether or not to undertake mitigation efforts could also be discouraged from doing so. If requested whether or not mitigation is a worthwhile funding, we could also be hesitant to say sure, as a result of we’ve seen the best way mitigation is handled in RR 2.0, and we don’t need to mislead our purchasers or colleagues about its benefits. This concern is widespread; legislators and regulators ought to need to decrease flood losses by incentivizing mitigation. Based mostly on our experiences with the brand new score engine, it seems that client mitigation efforts are minimally rewarded, if in any respect, in RR 2.0.
As a result of customers whose charges went down utilizing RR 2.Zero have been eligible for transition at their subsequent renewal, starting this previous October 1, present insurance policies being renewed into RR 2.Zero for the primary time are disproportionately these of customers experiencing charge will increase. Naturally, customers going through will increase search explanations from their brokers, who’re, too typically, unable to supply them. The score engine was designed to absorb information from brokers and produce a charge, so the system doesn’t present the way it arrives at a specific charge. Brokers can’t see what impact any single information level has on a charge, making it inconceivable for them to stroll policyholders by means of the system’s strategy of constructing an elevated charge. Policyholders deserve to know how their information is getting used to calculate their premiums, whether or not mitigation efforts may change these premiums, and the way current mitigation efforts are accounted for within the new system.
Unbiased brokers are the face of the NFIP, and our experience and private consideration to our purchasers are important belongings to this system. The shortage of transparency within the score engine makes our work tougher as a result of it leaves us with pissed off purchasers and incomplete info. Higher details about how charges are produced would assist us preserve the extent of service we’re accustomed to offering and would enhance the shopper expertise. Elevated transparency will result in higher belief within the NFIP, which may improve the flood insurance coverage take-up charge everywhere in the nation, and additional strengthen the NFIP.
The second pattern regarding brokers is the affordability of NFIP insurance policies as they transition to full-risk charges pursuant to RR 2.0. All new insurance policies are being issued at full-risk charges, which implies that these overlaying high-risk properties will instantly be charged commensurately high-risk charges. Current policyholders’ annual charge 6
will increase are topic to statutory caps (usually both 18 or 25 p.c per 12 months, relying on the kind of property). We help the continued use of statutory share caps on charge will increase because the NFIP transitions remaining policyholders to full-risk charges. That stated, even with statutory caps, some policyholders can be topic to the utmost allowable improve annually and can discover their premiums unaffordable earlier than they even attain their full-risk charges. For that cause, within the curiosity of retaining NFIP policyholders, we’re open to proposals to decrease the utmost charge cap, as long as policyholders’ glide paths to full-risk charges proceed.
The affordability downside can be exacerbated for policyholders who make modifications to their insurance policies that aren’t eligible for statutory caps, which apply solely to charge will increase prompted by a client’s trajectory alongside the glide path. If a change in premium is prompted by one thing apart from motion alongside the glide path, that change isn’t topic to the otherwise-applicable statutory cap. The NFIP refers to those as “premium-bearing modifications,”1 which embrace however are usually not restricted to the lack of an relevant low cost, a rise in protection quantity, or a lower in deductible. A rise in protection ought to stay topic to an otherwise-applicable charge cap. Omitting protection will increase from statutory caps arguably discourages policyholders from acquiring extra protection, leaving properties much less protected than they’d in any other case be.
With the advantage of this context, we want to help Congress as it really works to reauthorize this system by highlighting some alternatives to enhance the NFIP going ahead.
IV. Reauthorization Fundamentals
a. Lengthy-Time period Reauthorization
This system’s most up-to-date five-year reauthorization expired on September 30, 2017, almost 5 years in the past. Main as much as that deadline, the 115th Congress was unable to agree on reforms to this system. Consequently, the NFIP briefly lapsed 3 times inside a three-week interval in early 2018. Because the 2017 deadline, the NFIP has been topic to round 20 extensions of various lengths, and its present extension will expire on September 30, 2022, which remains to be the height of the Atlantic hurricane season.
Each short-term extension brings with it the possibility for a lapse in this system. When the NFIP lapses, customers are unable to resume current insurance policies or finalize the acquisition of current insurance policies. Claims proceed to be paid on current, in-force insurance policies, however customers engaged in ongoing actual property transactions could expertise disruptions in these processes, particularly if they’re buying a property in a compulsory buy space, the place flood insurance coverage is required. Plus, if a flood loss happens throughout a lapse, some claims might not be processed till this system is reauthorized. Prior NFIP lapses have been estimated to have disrupted over 1,000 house gross sales per day, and, after all, the longer the lapse, the higher the disruption./2
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1 The October 2021 Flood Insurance coverage Handbook addresses this concern in its “How you can Endorse” part. See https://www.fema.gov/websites/default/recordsdata/paperwork/fema_nfip-flood-insurance-manual-sections-1-6_oct2021.pdf.
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The sequence of short-term extensions during the last 5 years has been extraordinarily disruptive for everybody related to the NFIP, together with policyholders. Even when this system doesn’t lapse, the federal authorities and each side of the insurance coverage trade incurs prices related to getting ready for a lapse when the NFIP’s subsequent expiration date approaches. Brokers, carriers, lenders, and FEMA itself all develop contingency plans for an anticipated lapse. These expenditures are made whether or not the lapse happens or not, and solely a long-term reauthorization can keep away from them. This system’s effectiveness depends upon certainty.
b. Steady Protection
Considered one of our prime priorities is the inclusion of a steady protection provision in any NFIP reauthorization, in order that policyholders can transfer between the non-public market and the NFIP with out penalty. We have been gratified to witness the bipartisan help this provision garnered within the 2019 committee vote and admire its inclusion within the draft legislative textual content related to as we speak’s listening to. At the moment, customers could also be left in an untenable monetary place if, for instance, their non-public flood coverage is cancelled for causes exterior their management. Current regulation requires that, if such customers dwell in an space the place flood insurance coverage is required, they reenter the NFIP as in the event that they have been brand-new policyholders, at which level they’re instantly subjected to full-risk charges with out entry to the glide path.
Steady protection would permit a former NFIP client who bought a non-public flood coverage to return to the NFIP on the identical charge they have been paying once they left. With out steady protection, customers whose NFIP charges have been on a glide path towards full threat charges will successfully be penalized with larger charges for trying to return to the NFIP after leaving it for the non-public market.
c. Debt Forgiveness
The NFIP has not been financially steady since Hurricane Katrina hit the Gulf Coast in 2005. Hurricane seasons since have yielded a mixture of small and catastrophic losses, and, consequently, the NFIP’s debt grows annually. Policyholders are left to repay the debt, which quantities to $400 million yearly paid to the Treasury Division–and that simply represents the curiosity on the debt.
Since 2005, the NFIP has repaid a complete of $5.5 billion to Treasury; even the Trump administration’s choice to forgive $16 billion of the debt didn’t considerably alleviate this burden. This system is lastly shifting in a path of monetary stability with using RR 2.0; the prevailing debt represents an albatross round its neck from which it might by no means in any other case be free.
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2 See https://www.nar.realtor/blogs/economists-outlook/how-many-home-sales-will-be-affected-by-a-nfip-lapse.
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d. A Sturdy Affordability Framework
Because of the implementation of the Threat Score 2.Zero methodology, the NFIP is presently on a gradual monitor towards monetary stability. Nonetheless, as famous above, for RR 2.Zero to succeed, and for the NFIP to stay a viable program, customers want this system to think about the problem of affordability. The previous a number of years have been financially tumultuous for people and for the nationwide economic system, and, in some components of the nation, some property homeowners will discover their full-risk charges to be unaffordable, whether or not they’re new policyholders topic to them instantly or current policyholders experiencing most allowable annual will increase.
One of many main targets of the NFIP has at all times been to extend the variety of flood insurance policies in pressure; certainly, this system owes its very existence to that objective. Despite the fact that this system has been accessible for greater than a half century, solely 30 p.c of houses in high-risk areas have flood insurance coverage,/three and fewer than 25 p.c of the properties flooded by Hurricanes Harvey, Sandy, and Irma have been coated by flood insurance coverage./4
To extend the take-up charge, significantly in high-risk areas, the NFIP wants an affordability framework with means testing to make sure that flood insurance coverage isn’t out of attain for many who want it most.
Anecdotally, brokers are seeing some NFIP policyholders with low-risk properties transition to the non-public market when confronted with their first RR 2.Zero renewal. If that pattern bears out on a nationwide scale, the NFIP could possibly be more and more composed of the best flood threat properties within the nation. With out an affordability mechanism, RR 2.Zero may create an opposed choice downside for the NFIP, the place the federal authorities is left to cowl solely the highest-risk properties. The NFIP shouldn’t grow to be, successfully, the federal flood insurer of final resort.
We help each Threat Score 2.0’s progress towards full-risk charges and the event of an affordability framework. Shoppers want the detailed, correct info offered by RR 2.Zero to allow them to make smarter decisions about their stage of threat. Nonetheless, some customers could not be capable of afford the charges related to their property’s stage of threat as revealed by RR 2.0–if not now, then sooner or later. This system have to be reasonably priced for policyholders who won’t ever be capable of afford their property’s full-risk charge and for many who could in any other case discover themselves priced out of their houses earlier than their charges even attain full threat. As a result of brokers are in common communication with current and potential policyholders, they’re already seeing the consequences of RR 2.Zero will increase in a few of the communities they serve. For that cause, the NFIP doesn’t have the posh of selecting between full threat charges and an affordability framework.
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three See https://www.iii.org/article/spotlight-on-flood-insurance#:~:textual content=Flooding%20is%20the%20most%20frequent%20and%20expensive%20pure,pure%20disasters%20in%20the%20United%20States%20contain%20flooding.
Four See https://riskcenter.wharton.upenn.edu/policy-incubator/upgrading-flood-insurance/closing-the-flood-insurance-gap/.
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e. Higher Fee Transparency
Shoppers and brokers want extra details about how the brand new methodology’s score components mix to calculate NFIP premiums, particularly within the context of mitigation efforts. Reauthorization ought to embrace provisions demanding higher charge transparency from FEMA, together with details about how the score engine builds a charge, how some score components could also be used to extend a charge and the way different score components could also be used to lower it. Everybody invested in the way forward for the NFIP would profit from understanding how the system is meant to work.
Fee transparency can be bolstered by the disclosure of every policyholder’s full actuarial premium charge, which is included within the Nationwide Flood Insurance coverage Program Reauthorization Act of 2022 dialogue draft listed for as we speak’s listening to.
Rep. Nydia Velazquez’s Nationwide Flood Insurance coverage Program Administrative Reform Act of 2022, which is listed for as we speak’s listening to, consists of provisions that might strengthen disclosure necessities for NFIP insurance policies. We help these provisions, which embrace the requirement of an acknowledgement web page confirming that the service and client each absolutely perceive the scope and limitations of the coverage being bought.
f. Mapping Enhancements
NFIP policyholders would profit from a federal funding in mapping enhancements. To the extent that the NFIP depends on mapping to judge threat, maps ought to replicate information accessible by means of using cutting-edge know-how like geospatial intelligence and world positioning system satellites. The NFIP ought to proceed to collaborate with the U.S. Geological Survey and different federal businesses to maximise the accuracy and reliability of flood maps.
g. Mitigation
Mitigation helps management the NFIP’s claims prices. Sturdy mitigation efforts permit communities, householders, and companies to renew regular exercise extra shortly after a catastrophe. We proceed to help increasing the quantity allowable for elevated value of compliance (ICC) protection for policyholders and permitting its use to fund pre-flood mitigation efforts. Nonetheless, utilizing the RR 2.Zero methodology, policyholder mitigation efforts seem to not be rewarded with decrease charges the identical manner they have been within the legacy score system. We’re monitoring this concern as RR 2.Zero continues to be carried out.
h. An Agent Advisory Council
Brokers are the face, the gross sales pressure, and the primary responders of the Nationwide Flood Insurance coverage Program, and so they deserve a voice within the regulatory course of. An Agent Advisory Council housed inside FEMA however impartial of the company may present FEMA with suggestions to boost the shopper expertise, together with however not restricted to enhancing the appliance and claims processes, enhancing communications about NFIP programmatic modifications, and offering enter on agent coaching wants and potential options. An Agent Advisory Council ought to embrace impartial brokers who’re specialists on flood insurance coverage and routinely promote and repair NFIP insurance policies.
The dialogue draft of the Nationwide Flood Insurance coverage Program Administrative Reform Act of 2022, listed for as we speak’s listening to, requires a broader stakeholder Federal Flood Advisory Council, and we’d help that idea as properly. Any such council ought to embrace at the least one seat for every of the three nationwide impartial agent organizations, to account for the assorted views inside the agent group.
V. Conclusion
We help the NFIP as a result of it gives crucial flood protection to residential and business property homeowners, and we help Threat Score 2.Zero as a result of it gives property homeowners with a extra correct estimate of their flood threat than was beforehand accessible to them. This extra info will assist property homeowners make sound selections about find out how to shield their investments. Plus, the progress in the direction of risk-based charges will allow the NFIP to rebuild its long-term monetary stability for the primary time in almost twenty years.
We want to see extra transparency within the charges produced by RR 2.0, significantly when these charges are at odds with the expectations of educated flood specialists, and we’re dedicated to the creation of an affordability framework to make sure that current NFIP policyholders are usually not priced out of their houses as their charges improve alongside the glide path towards full threat.
We urge Congress to work in the direction of a long-term NFIP reauthorization that may appeal to and retain policyholders and supply everybody related to this system the understanding wanted to stay within the enterprise of flood insurance coverage. We stay up for persevering with to work with you all on this crucial concern.
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Unique textual content right here: https://financialservices.home.gov/uploadedfiles/hmtg-117-ba04-wstate-rivera-mirandaa-20220525.pdf