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The latest on the NFIP reauthorization

The U.S. House of Representatives Financial Services Committee finished the mark-up process this week on a series of seven bills aimed at reauthorizing and reforming the National Flood Insurance Program for a period of five years and, in part reduces the level of compensation that Write-Your-Own companies receive for administering the program. Additionally, a bill that would reauthorize the NFIP for six years and cut WYO compensation has been introduced in the U.S. Senate.

The House bill

Under the current system WYOs, receive just under 32 percent of NFIP premiums in order to administer the program. Under the House bill ("21st Century Flood Reform Act"), that percentage would be lowered to 27 percent, phased in over a period of three years.

In addition to reducing the WYO compensation the proposed bill would address consumer cost and affordability by lowering from 18 to 15 percent the cap on any individual policyholder’s annual rate increases and limiting the chargeable risk premium of any residential property to no more than $10,000. The bill also would cut the annual surcharges created by the Homeowner Flood Insurance Affordability Act of 2014.

It would introduce measures to encourage private market participation in the flood insurance marketplace. The bill would ensure that private flood insurance can be used to satisfy the NFIP’s continuous coverage requirement, an essential aspect of ensuring policyholders are not penalized for moving from one policy to another. The noncompete clauses that WYOs have to agree to also would be eliminated, allowing WYOs to sell their own private flood insurance policies outside of the NFIP.

The bill repeals the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas and requires the Federal Emergency Management Agency to align with private-sector practices and allow policyholders who cancel their NFIP policies during the middle of the policy term to receive refunds on a pro-rated basis if the policyholders elect to replace their NFIP polices with private flood insurance.

Now that the legislation has passed the House committee, it is believed that the seven bills will be merged into one bill and be considered on the House floor next month.

The Senate bill

The recently introduced Sustainable, Affordable, Fair and Efficient National Flood Insurance Program Reauthorization Act (SAFE NFIP) 2017, is sponsored by Sens. Robert Menendez, D-N.J., and John Kennedy, R-La. Under the bill, the NFIP would be reauthorized for a period of six years. WYO compensation would be cut from its current levels of 31.9 percent to 22.46 percent, while producer compensation potentially could be capped at 15 percent.

In addition, the bill also would: prohibit FEMA from increasing premium rates above 10 percent per year on any policyholder for six years; require FEMA to offer zero or low-interest loans to fund mitigation projects by homeowners who pass a cost-benefit test, reducing premiums for the policyholder and mitigating risk for the NFIP; increase coverage limits to $500,000 for residences and $1.5 million for multifamily and business structures; increase the maximum Increased Cost of Compliance payment from $30,000 to 100,000; and use funds collected from the $25 surcharge for primary residence and $250 surcharge for nonprimary residence and businesses to affordability and mitigation efforts.

Notably absent from this bill is any provision meant to encourage private market participation in flood insurance marketplace. Several other flood insurance bills that have been introduced in the Senate and House have included provisions that would ensure that private flood insurance can be used to satisfy the NFIP’s continuous coverage requirement and eliminate the noncompete clauses the WYOs have to agree to right now. The SAFE NFIP Reauthorization Act is silent on both points. The NFIP is set to expire at the end of September.

PIA believes policyholders will be hurt by commission cuts

If commissions are cut, many producers will choose to stop selling the NFIP flood product, a product that already is time consuming to service to which anyone who had Superstorm Sandy claims can attest. The cost of selling and servicing these policies will outweigh the commission received.

PIA believes that policyholders will be hurt by this cut in commissions. A situation will develop in which people would be buying a complicated and potentially expensive flood product without the expert advice of an independent producer to guide them. This could result in situations in which those that are required to purchase flood insurance will either purchase too much or, more likely, not enough coverage. Those who are not required to purchase flood insurance may decide against the purchase even though it may be in their best interest.

The outcome will be an NFIP that is devoid of "good risks" like those homes in low-risk flood zones who might have purchased flood insurance upon the recommendation of an independent producer, but who now will not and policyholders who purchased coverage inadequate for the risk. This creates a situation in which the NFIP could take in less premium dollars and when a flooding event does occur, many unhappy policyholders will have no one to call besides their local federal representative.