It is no secret that the National Flood Insurance Program (NFIP) is dramatically reducing its subsidies for commercial flood insurance. Political ramifications and public policy issues aside, if NFIP didn’t have the ability to borrow from the U.S. Treasury to pay claims, it could not exist as a commercial carrier. But what is next? What needs to be done? Is there a private market solution? What options are available?
Created by a Congressional act in 1968, NFIP is the principal flood market for residential and commercial insureds. Prior to Hurricanes Ivan, Katrina, Rita and Ike, NFIP took in more premium than it paid out in claims1, creating a surplus that was wiped out by the those storms. By 2012, the NFIP was $20.7 billion in debt. When Superstorm Sandy hit in October 2012, that figure surged to over $30 billion.2
These losses are only part of the story. Mandatory purchase requirements, statutory caps on premium increases, the legislative mandate of FEMA, lack of capital requirements or need to earn a profit, and subsidized premiums that do not reflect risk exposures have all contributed to NFIP’s instability and dysfunction as its deficit balloons.
According to FEMA, there is an estimated $3.3 billion in annual premium paid to NFIP. Certainly, this creates an incentive for the private sector and one of the largest growth opportunities in the property and casualty market today. Can the challenges causing NFIP’s problems be adequately addressed by the commercial market? A 2014 report released by the Government Accountability Office (GAO) indicated that private insurers are not likely to write flood insurance without reforms, including the ability to charge adequate risk-based premium.3
Historically, commercial insurers have provided limited flood insurance either as excess capacity attaching above NFIP limits or as sublimits within large sophisticated risk management programs. Wide scale participation has been hampered by the same core issues that have undermined NFIP. These issues underscore the differences between NFIP and the commercial market:
In their latest attempt to address some of these issues, Congress enacted the Biggert-Waters Flood Insurance Reform Act of 2012. While the Act was modified by the Homeowner Flood Insurance Affordability Act of 2014, those changes addressed personal lines and did not significantly affect the commercial market. Some of the key changes which have advanced the private commercial flood market include:
At AmWINS, we believe the privatization trend will continue and we are investing resources to provide our clients with competitive alternatives to NFIP, including dedicated in-house facilities. AmWINS’ property brokers are current on the latest market developments and are prepared to guide retail agents and brokers – and their insureds – through this often misunderstood line of coverage.
This article was authored by Harry Tucker, National Property Practice Leader with AmWINS Brokerage.
1 “Flood Insurance – Strategies for Increasing Private Sector Involvement”. GAO, January 22, 2014.
2 “The National Flood Insurance Program: Status and Remaining Issues for Congress Congressional Research Service”. February 6, 2013.
3 “Flood Insurance – Strategies for Increasing Private Sector Involvement”. GAO, January 22, 2014.
4 “The potential for flood insurance privatization in the U.S. Could carriers keep their heads above water?” Deloitte & Touche, 2014.
5 Author’s note: Pre-Flood Insurance Rate Map (FIRM) buildings are those built before the effective date of the first Flood Insurance Rate Map (FIRM) for a community. This means they were built before detailed flood hazard data and flood elevations were provided to the community and usually before the community enacted comprehensive regulations on floodplain regulation.
Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.
(c) 2017 AmWINS Group, Inc.
Over the last few years, the legal cannabis industry has seen rapid growth and had a significant impact on the U.S. economy. With states continuing to legalize its use, insurance needs for cannabis-related businesses are becoming a popular topic of discussion. This article examines the evolving cannabis industry by exploring five key issues impacting coverage.
Construction contract negotiations, which determine the kind and amount of insurance required for a construction project, can be time-consuming, complicated and frustrating. Project owners require contractors on a project to name the project owner as an additional insured on the contractor’s casualty insurance program. It's important that both project owners and contractors understand the coverage provided by these additional insured endorsements. This article discusses four common ISO additional insured endorsements related to commercial general liability policies purchased by contractors, including their limitations, conditions and exclusions.
A common complication during the claim process is the late reporting of claims. In some cases, a late claim can put the agent or broker's own E&O policy in jeopardy. There are many reasons for missing a reporting deadline; however, in most cases, they will not matter to the insurer or the courts. This article discusses typical claim reporting requirements, common causes of late reporting, and recommendations to mitigate the risk of late notice claim denials.
The theories of recovery, as well as the ensuing loss provisions, contained in property insurance policies are often complex and, at times, seemingly in conflict. Although a policy may not directly address these theories, their application by courts plays a significant role in the coverage determination process after the claim. It is essential that brokers understand the primary theories of recovery – Efficient Proximate Cause, the Concurrent Causation Doctrine, and the Anti-Concurrent Causation Doctrine – in order to navigate the challenging post-claim process and effectively serve their clients.
Ordinance or Law insurance coverage provides limited protection for costs associated with repairing, rebuilding, or constructing a structure when physical damage to the structure by a covered cause of loss triggers an ordinance or law. Compliance with ordinances and laws after a loss can add 50% or more to the cost of a claim. This article will help you educate your insureds on exclusions and limitations and help them take a proactive approach to their insurance program.
In 2017, the issue of sexual harassment – especially in the workplace – gained greater awareness as accusations of harassment by high-profile individuals were constantly in the news. In many cases, sexual harassment lawsuits seriously impacted businesses and their respective insurers. Employment Practices Liability Insurance not only provides protection against employee lawsuits, but can also help your clients mitigate their sexual harassment risks.