Ensure the Development of a Private Flood Insurance Market

In order to ensure a stable, affordable and sustainable flood insurance market, a private market for flood insurance must be allowed and encouraged to develop. Increasing private sector involvement in flood insurance will benefit consumers by expanding available insurance options, lowering costs and increasing the number of at-risk properties that are insured. The Flood Insurance Market Parity and Modernization Act (H.R. 2901 and S. 1679) is an important first step to achieving wider availability of private market flood insurance.

Overview:

  • Prior to the enactment of the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), lenders were permitted to accept private flood insurance to meet the mandatory purchase requirement of the National Flood Insurance Reform Act of 1994. The Federal Emergency Management Agency (FEMA) published guidance with criteria to assist lenders in deciding whether to accept a private flood insurance policy, however lenders had discretion to accept a policy that did not meet the FEMA criteria if the lender was satisfied that the policy adequately covered the collateral. 
  • BW-12 incorporated the FEMA criteria into the definition of private flood insurance and required that private policies be "at least as broad as" a National Flood Insurance Program (NFIP) policy in order for a lender to accept it. This language makes it especially difficult for lenders to determine whether a private policy provides the necessary coverage under the definition, as even minor deviations in policy language can be construed as failing to provide "at least as broad" coverage.  Lenders thus are reluctant to accept private policies and risk federal liability.

Impact:

  • While the intent of BW-12 was for private flood insurance policies to satisfy the mandatory purchase requirement, the statutory language actually made it more difficult for lenders to accept private policies by requiring private policy coverage to be "at least as broad" as NFIP coverage.
  • Lenders typically do not have the staff or expertise to determine whether a private policy selected by a borrower provides coverage "at least as broad" as NFIP coverage. With the risk of civil money penalties of $1,000 per violation, lenders are understandably hesitant to accept private flood policies.
  • Under current law, it is not clear whether someone who was previously covered under an NFIP policy but moves to a private carrier would be able to later move back to an NFIP policy at their previous rate. This creates a disincentive for consumers to choose a private policy.

MBA's Position / Next Steps:

  • Nationwide availability of affordable flood insurance is an important part of expanding homeownership and building communities. MBA supports efforts by Congress and the Administration to ensure the continued strength of the NFIP, as well as the development of a private market for flood insurance. 
  • H.R. 2901 and S. 1679 clarify the statutory language to provide a clear definition of private flood insurance-making it easier for lenders to accept private policies. These bills also clarify that continuous coverage by private flood insurance meets the continuous coverage requirement under the NFIP rules. This clarification will both encourage the development of the private market and allow borrowers that choose private coverage the option to return to the NFIP if they wish.
  • H.R. 2901 and S. 1679 effectuate the intent of Congress to encourage the growth of a competitive and sustainable private flood insurance market. Increased private sector involvement will expand available insurance options and lower costs to consumers. They will also reduce the federal government's exposure to flood loss over time.
  • Until the BW-12 definition of private flood insurance is corrected, policymakers will have no data as to how increased private sector involvement could expand available flood insurance options, lower costs to consumers, and reduce the federal government's exposure to flood loss over time. Such data is vital in light of the pending 2017 NFIP reauthorization date. Prompt enactment of this legislation is imperative to enrich the fast approaching flood insurance public policy debate.
  • In April 2016, H.R. 2901 was unanimously approved by the House of Representatives. S. 1679 was discussed by the Senate Banking Committee in a September 2016 hearing. MBA urges Congress to pass this important legislation.

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