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Private Flood Insurance Questions- Asked By the Insure

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Private Flood Insurance Questions- Asked By the Insure

By: Adam M. Matheny

Is it possible for private insurers to assess the risk for individual properties affordably?

In order for this to happen, insurers must have access to highly accurate “first-floor height” such as that provided by technology such as the use of LiDAR (light detection and ranging) laser inclinometers. This is far more important than the use of geographic risks of flood as it will allow insurers to assess premiums based on more accurate information than was previously available.

Are mortgage companies willing to accept private flood insurance in lieu of that issued by the NFIP?

All homes in the SFHA must have flood insurance, which accounts for approximately 50% of those insured by the NFIP. For decades, it was uncertain whether private flood insurance meets the “mandatory purchase requirements” and as such, lenders were not always willing to loan to those with private insurance.

In January 2019, the FDIC issued a ruling that made it possible for banks to accept private insurance providing the coverage to meet the necessary requirements. This makes it possible for further investment in the flood insurance market.

Are state insurance regulators going to permit private flood insurers to underwrite and set their premiums that will make this opportunity worth the risk?

The problem is that most states are using rules designed for residential property insurance rather than rules that are specifically designed for private flood insurance. To make matters worse with private flood insurance still an emerging market and the catastrophe models are still emerging, and the laws being applied are so burdensome that they tend to scare away the private insurance market. Some states even forbid the use of catastrophe models requiring insurance companies to rely on unreliable historic information.

It gets worse, most insurance companies rely on reinsurance to help offset their flood risk. Yet in some states, they are not allowed to add the cost of reinsurance to their rates. Many states prohibit insurance companies from not allowing individuals to renew their policies or increase rates after catastrophes or “Acts of God.” This would include virtually every flood claim shackling insurance companies.

Given the vagaries of laws and lack of comprehensive rules, it simply doesn’t make much sense for large insurers to become involved in the private flood market.

What can private insurance companies do to bring hesitant buyers and insurers together?

In order for people to buy insurance, it must be available. However, most insurance agents are intimidated by flood insurance. The amount of specialized training and knowledge required to sell and service flood insurance may not justify any potential commission.

On top of this, the average consumer may not have a good grasp of their flood risk and the need to buy flood insurance. Many believe that while mandatory flood insurance for homes in the SFHA indicates that there is no need to purchase flood insurance for those homes outside of the SFHA. Far too many are under the mistaken impression that their standard homeowner’s insurance covers flood damage. Then there are those who feel that the cost of this “optional” coverage is too high and the list of reasons not to purchase flood insurance goes on. Yet this is the perfect time for private insurers to enter the market and simplify the entire process.

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