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Private Insurance Model Law Vs Agents


Private Insurance Model Law Vs Agents

By: Adam M. Matheny

Model Law, Education Requirements Controversial

Florida state lawmakers are moving forward with a potential new law that will boost private flood insurance sales. Insurers don’t believe that these laws are necessary, and in fact, find them to be a burden.

For the most part, private flood insurance cannot be sold as an admitted product—which means that buyers don’t have protection due to state regulations when it comes to issues like rate approvals, the handling of claims, and policy forms. A model law can provide the industry with a framework that would encourage carriers and reinsurers to participate in coverage for flood risks.

Since its inception, legislators have been seeking ways to make the National Flood Insurance Program self-supporting. Conflicts over limiting premium increases versus more accurate rates have stymied the project. Some in the industry think that the mere notion of using a federal program for the bulk of a state’s flood insurance coverage is problematic to begin with. New laws have been put into place in Florida which will require lenders to accept private flood insurance so long as it meets or exceeds that offered via the NFIP.

Should Agents Be Required to Educate Consumers?

One reason the model law has met resistance is the inclusion of a so-called “education clause.” This clause mandates the education of consumers, by agents, with regards to the federal flood insurance options versus private alternatives.

Opponents say that the clause is far too vague—it doesn’t give clear direction as to how agents are to educate consumers or what information they are required to share. Others don’t think the language is this problematic and frame the requirement as a “responsibility” rather than a “burden.” They point to the fact that well over half of those with property damaged by Hurricane Harvey lacked flood insurance and point out that requiring agents to broach the topic with their customers could have effectively prevented a great deal of loss.

They also reference the fact that agents stand to make about twice as much commission using the federal policy, and this conflict of interest means it’s important to require them to inform consumers about private flood insurance options that offer similar or competing coverage.

Representatives for insurance agents’ interests counter that agents stand to make more if flood insurance policies increase across the board, federal or private not-withstanding, and that the difference in commissions is less stark than it initially appears due to fees. They argue that insurance agents are already incentivized to educate consumers, and that including the clause in the law simply muddies the waters when it comes to their exact responsibilities.

Whether or not the clause will be included in the act is up for debate, due to how controversial it is—there are multiple interest groups that take issue with it, with regulators calling it far too burdensome, and legal advisors blasting it for being too vague.

Effects on Commissions and Premiums

The long-term effects of private flood insurance entering the market could be interesting. The chief executive officer of Aon Edge, Jon Dickson, believes that the difference between the commissions earned with federal versus private insurance won’t be particularly important.  His take on it is that the federal insurance prices are high enough to shut some potential homeowners out of the market entirely; private flood insurance will provide a cheaper alternative and enlarge the market in general.

He does acknowledge that there is a difference in commission rates, with private insurance commissions ranging from 10-15% and some federal commissions paying out up to 24%–although that isn’t a percentage of the policy in full. He also understands why advocates of the law believe more education is necessary but sympathizes with agents that resist the new requirements. In his view, the model law is necessary, and it will simply take some time to work out how it should be implemented.

He also believes that pushing for private insurance brings some much needed competition to the industry, as FEMA has traditionally attempted to maintain the NFIP at status quo rather than contemplating methods to expand the market.

Insurers Unsure

Numerous insurance organizations, including the Property Casualty Insurers, the National Association of Mutual Insurance Companies, and the American Insurance Association have expressed their displeasure with the concept of a national legislative model law, declaring it an unnecessary complication for the industry.

Others, however, have been more supportive, noting that the market is expanding at an impressive speed—there is significant growth not only in the number of companies offering flood insurance. The federal government, thus far, has encouraged this growth. FEMA, after all, has hoped to see coverage doubled by 2022, and this is one path to achieving that goal.

There’s still plenty of opportunities out there to achieve this, considering that less than half of property owners in high risk areas have flood coverage, and less than 5% of US residents overall carry a policy with flood insurance coverage—numbers that should be concerning, with every state and the vast majority of counties having experienced serious flooding events at some point.