Part 5: Challenging the Force-Placed Insurance Business Model: Flood Insurance
The history of Force-Placed Insurance would not be complete without including the force-placed flood insurance turmoil that occurred after the 2012 passage of the Biggert-Waters Act (BW-12). Congress imposed a punitive win-lose deal on taxpayers who owned second vacation homes. A taxpayer revolt occurred in New Jersey and New York that lead to the passage of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA)
In 1936, the federal government got involved with flood risk with the passage of the Flood Control Act. Money was funneled to Florida to build the levee on the south side of Lake Okeechobee.
Hurricane Betsey in 1965 was the nation’s first billion-dollar flood disaster and led to the National Flood Insurance Act in 1968. Five years later, in 1973, the Flood Disaster Protection Act made the banking industry the traffic cop for the flood program by mandating insurance for all federally regulated loans.
Flood Insurance Challenges
During the 1990s, Congress continued to pass regulation to keep the NFIP healthy as participating communities grew from ten thousand to sixteen thousand over a four year period. Midwest floods in the spring of 1993 resulted in 90% uncovered losses. Congress acted with the National Flood Insurance Reform Act of 1994, increasing the mandatory coverage requirements for lenders. Ten years later, the Flood Insurance Reform Act addressed repetitive loss properties. Congressional action did not dodge the reality that the world’s largest flood insurance company was being run into the ground by politicians.
2005 Hurricane Parade
2005 was the year of the perfect storm scenario with Katrina, Rita, and finally, Wilma stacking up almost $18 billion in NFIP claims. Katrina, which broke the levees in New Orleans, was $16 billion alone. As the NFIP was gasping for congressional relief, it took until the new democratic Congress was seated in 2010 to begin working on an NFIP overhaul.
2012 Biggert-Waters Act
I’m not going to go into great detail on the policy of the Biggert-Waters Act (BW-12) as we will cover that in Miniter Group’s upcoming flood compliance webinar in July. The act was congresses’ attempt to overhaul the NFIP and implement risk-based premiums.
The famous New Jersey shore has middle-class vacation homes stacked up like cordwood for 141 miles from Asbury Park to Cape May. BW-12 eliminated the flood subsidies for these families by removing pre-Firm subsidies and “grandfathering” for vacation homes. Although BW-12 hurt other flood-prone vacation homes across the country, the concentration of these homes in New Jersey that were in the process of re-building from super-storm Sandy, resulted in a deafening cry to Washington from these Residents.
Senator Bob Menendez (D-NJ) took up their cause, and the Senate passed the Homeowners Flood Insurance Affordability Act of 2013 (HFIAA). It was modified and passed by the House in March of 2014 under the Grimm-Waters Act of 2014.
BW-12 had the opportunity to properly risk-rate NFIP policies and may have generated enough premiums to create a self-funding national flood program. The NFIP, using BW-12, began remapping of flood zones while eliminating NFIP subsidies and grandfathered rates. HFIAA rolled back these needed changes. The result is that the NFIP continues to deficit spend. It would not survive if it weren’t for the grace of the US congress.
Regulator Compliance Favorites
The turmoil caused by BW-12, followed by HIFFA, sent the Joint Agencies to the regulatory dance floor doing the 2-step. In October 2013, they proposed a rule based on the BW-12 changes. The passage of HFIAA in 2013 put that rule on hold. It wasn’t until 2015 that the Joint Agencies published their final rule, but in the two years from 2014-2015, the regulators had a compliance field day due to the lack of clear regulation.
It started in July of 2014 when FEMA rescinded its “Mandatory Purchase of Flood Insurance Guidelines.” Before this, lenders used this FEMA guidance as the backup to the Joint Agencies guidance. Now neither was available!
In the fall of 2014 Minter published a White Paper titled “Force-Placed Insurance, Today’s Myths, Confusion, and Today’s Realities.” The white paper had in-depth research on how lenders could defend their flood compliance programs using past guidance back to the 1973 Flood Disaster Protection Act. Lenders used this information multiple times to fend off inconsistent regulator interpretations of the new flood law.
The regulators focused on flood zone remapping. The flood determination companies had as much time as needed to get these new flood loans to the lender, but the lender had to act with the exact timing for mailing SFHA borrower notifications. Another popular regulator criticism was the timing of these flood notification and premium billing. Regulators were counting days up to 45, or was it 46? Do lenders force-place remap properties after 30 days, or 75? We also had to address flood policy renewals. The regulators counted all the way to 320, or was it 317 days? Once we add the days, did we send renewal notification letters or not. These were the questions we addressed in all regions of the country. Individual regulators approached each of these questions differently. It all finally ended with the 2015 Joint Agency Final Rule.
We converted that white paper into a 2014 webinar that was watched by over 1,000 bankers. As part of our July 2020 webinar “Flood Compliance: Biggert-Waters to Today,” we will be supplementing this original research with additional guidance since 2014.
The 2015 Joint Agency Rule was a welcome addition to the guidance for force-placed flood insurance. However, the guidance included mandatory escrow of flood insurance premiums for new and existing loans after a “triggering event.”
Insurance trackers did not like the Escrow section of the 2015 Joint Agency Rule. Mandatory escrow on new loans and the run-off of existing loans has almost eliminated flood force-placements. The trackers took a revenue hit as commissions from insurance premiums from as these placements declined. Reduced flood premium has put revenue pressure on insurance trackers who subsidize their tracking fees with commissions from force-placed flood insurance policies. We will detail this business model in our next blog.
Private Flood Insurance
When the 2014 Joint Agency proposal was first published, it was apparent that the Joint Agencies had no plans to address private flood insurance. It wasn’t until July of 2019 that the joint agencies finally addressed private flood insurance as required by the 2012 Biggert-Waters Act. Private flood insurance was the latest issue the industry had to address. It was implemented smoothly during 2019. We will address private flood insurance tracking in detail during our July 2020 webinar titled “Flood Compliance: Biggert-Waters to Today.”
Flood insurance has always been the pet of insurance regulators as there are many “Got-Ya’s” in the regulations. The period from 2012 to 2015 was particularly challenging for insurance trackers and regulated lenders. Mandatory escrowing of flood insurance premiums negatively affected the revenue structure of the existing force-placed insurance business model. Decreased FPI flood premium levels are another reason for the force-placed insurance industry to consider a new business model.
Next: We will place a critical eye on the legacy pricing models of force-placed insurance tracking.