Another perfect storm: Why we must act before flood insurance runs dry

We’re on the verge of another mega storm.

No, it’s not another hurricane. But if it comes to fruition, this storm will leave U.S. homeowners stranded with zero options when it comes to flood insurance – federal or private.

{mosads}Once again, Congress has failed to include corrections to prior legislation that will assure consumer choice when it comes to flood insurance. Once again, they have failed to block threats made by federal lending regulators to deny millions of flood insurance buyers the flood insurance choices they deserve. And, if Congress doesn’t pass a reauthorization measure that includes needed revisions for the struggling National Flood Insurance Program by Dec. 8, that door will also be closed to homeowners in need of flood coverage. If this perfect storm is allowed to form, private policies will be pulled from the market and the federal program will shut down without funding. 

Last month, Congress sent a bill to President Trump’s desk that provides $36.5 billion in disaster relief to support the victims of the recent floods and storms. In doing so, they passed up another opportunity to reform the nation’s flood insurance system. Instead, the measure gives up on equitable treatment of taxpayers by fueling the struggling NFIP with a $16 billion bailout at taxpayer expense.

In the meantime, federal lending regulators are slated to implement a regulation that will limit private flood insurance availability and bring chaos to the private market—just when it is needed most. In a recent notice in the Federal Register, federal banking regulators announced plans to issue a final rule in 2017 related to their 2016 proposed rule titled “Loans in Areas Having Special Flood Hazards–Private Flood Insurance.” If federal lending regulators implement this misguided rule based on a definition laid out in the Biggert-Waters Flood Insurance Act of 2012, it could force free market flood insurers (those unrelated to the federal monopolistic program) to cancel thousands of policies in the coming months.

Though Congress needs to reauthorize the NFIP before it expires this year, the devastating hurricanes of recent months have amplified calls for a comprehensive and intelligent reform of the NFIP. To that end, any actions taken by Congress should do three things: create more choice for consumers thereby lowering premiums and increasing coverage; provide a more level playing field for private insurers by blocking ill-advised attempts by federal banking regulators to usurp state insurance regulatory authority; and improve America’s flood resilience by decreasing the subsidies for building in high flood hazard areas.

Congress’s inaction on reform could prove devastating to the private flood insurance market and deny millions of American homeowners the flood insurance options and better coverage available only from private flood insurers. If the proposed lending rule is not blocked, private insurers will be forced to cancel existing policies and lenders may even begin to reject replacement policies. Mystifying to all rational observers is the fact that the draft rule will create a situation where any private flood insurance policy that strictly conforms to the rule will be in violation of existing state regulations in all 50 states leaving consumers with only one flood insurance option, the financially compromised NFIP.

The Solution is Clear

A solution is already out there, one which would lay to rest any confusion that may exist in the collective consciousness of lending regulators: a bill introduced by Sens. Dean Heller (R-Nev.) and Jon Tester (D-Mont.) and Reps. Dennis Ross (R-Fla.) and Kathy Castor (D-Fla.). The language contained in the Private Flood Insurance Market Parity and Modernization Act (S. 1679 and H.R. 1422) corrects certain flawed language in Biggert-Waters, to open the market to more evenhanded treatment of private insurers.

If Congress fails to pass this technical correction, federal banking regulators are on course to force lenders to supplant state insurance commissioners relative to adjudicating what flood insurance can or cannot be purchased by consumers. As a result, consumers who find better rates and coverage in the private market or who have concerns about the viability of the NFIP may have nowhere to turn.

Consider a recent case in Houston, as reported by the Houston Chronicle. A homeowner whose home was flooded by Hurricane Harvey sued his mortgage lender for telling him he was not required to purchase flood insurance. The homeowner understood the lender to mean he had no exposure to flood, which proved not to be the case. Lenders are not trained to provide insurance advice and should not carry the burden of determining the adequacy of flood insurance when highly qualified state regulators are already doing so.

Insurance regulators, not banking regulators, know best when it comes to determining which flood insurance policies are appropriate for consumers. Congress needs to pass the Private Flood Insurance Market Parity and Modernization Act to correct the erroneous definition of private flood insurance in the Biggert-Waters Act and throw open the doors to consumer choice. American flood insurance consumers deserve the right to choose from many options rather than a money-losing federal monopoly; they deserve more accurate rates, efficient processes and better technology—and they deserve it now. 

Craig Poulton is chief executive officer of Salt Lake City-based Poulton Associates, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATcoverage.com. Follow us on Twitter @nciptweets.