PRIVATE FLOOD INSURANCE & NFIP

Question 1

SECT B: PRIVATE FLOOD INSURANCE & NFIP

NFIP OBJECTIVES

Answer 1

1. Make primary flood insurance available
2. Mitigate and reduce flood risk through floodplain management
3. Ensure reasonable insurance premiums

Question 2

SECT B: PRIVATE FLOOD INSURANCE & NFIP

MANDATORY PURCHASE OF FLOOD INSURANCE REQUIREMENT

Answer 2

• Mandatory purchase requirement if both
1. Property is in special flood hazard area (SFHA)
2. Mortgage is backed by federal government, federally regulated lending institutions and GSEs

• Mandatory purchase requirement is enforced by the lender, rather than FEMA

Question 3

SECT B: PRIVATE FLOOD INSURANCE & NFIP

NFIP (CROSS-) SUBSIDIES

Answer 3

1. Pre-FIRM: properties built/ improved before the later of
   a. 12/31/1974
   b. First FIRM published for that community
2. Newly mapped properties into a SFHA (on or after 4/1/2015), if coverage in effect within 12 months of the map revision date
3. Grandfathered: properties that were built in compliance with the FIRM in effect at the time of construction

Question 4

SECT B: PRIVATE FLOOD INSURANCE & NFIP

CURRENT ROLE OF PRIVATE INSURERS IN THE NFIP (3)

Answer 4

1. SERVICING OF POLICIES & CLAIMS MANAGEMENT
   I. DIRECT SERVICING AGENT (DSA) - SEELS NFIP POLICIES ON BEHALF OF FEMA
   II. WRITE-YOUR-OWN (WYO) PROGRAMS - PRIVATE INS COMPANIES ARE PAID TO ISSUE & SERVICE NFIP POLICIES
2. REINSURANCE - BENEFITS: TRANSFERS RISK, REDUCES BORROWING FROM TREASURY, REDUCES GOVT VOLATILITY
3. PRIVATE FLOOD INSURER

Question 5

SECT B: PRIVATE FLOOD INSURANCE & NFIP

ISSUES & BARRIERS FOR PRIVATE PRIMARY FLOOD INSURANCE

Answer 5

1. Flood insurance coverage “at least as broad as NFIP”
   • Who would evaluate whether specific policies met the “at least as broad as” standard and what criteria would be used in making this evaluation?
2. Continuous coverage for (cross-) subsidies or subsidy is eliminated
   • Need private flood insurance to count for continuous coverage
3. NFIP rates
   • NFIP full rates do not include a profitable return on capital
   • Subsidized rates for 3 categories of properties are not actuarially adequate
4. Regulatory uncertainty
5. Ability to assess flood risk accurately

Question 6

SECT B: PRIVATE FLOOD INSURANCE & NFIP

POTENTIAL EFFECTS OF INCREASED PRIVATE SECTOR INVOLVEMENT IN FLOOD MARKET (2+/2-)

Answer 6

(+) INCREASED CONSUMER CHOICE - ADDITIONAL COVERAGE (BI, LIVING EXPENSES)
(+) CHEAPER FLOOD INS FOR NON-SUBSIDIZED NFIP POLICYHOLDERS
(-) UNKOWN CONSUMER PROTECTION - LANGUAGE IN PRIVATE FLOOD INSURANCE POLICIES IS NOT STANDARDIZED
(-) ADVERSE SELECTION AGAINST NFIP - NFIP CANNOT REFUSE TO WRITE A POLICY