Wading into Flood Insurance 

June 12, 2018

The National Flood Insurance Program (NFIP) has been in existence since it was created by Congress through the National Flood Insurance Act (NFIA) of 1968 to respond to the rising cost of tax-payer-funded disaster relief for flood victims. The NFIA granted FEMA (Federal Emergency Management Agency) the authority to establish and manage the program which allows interested persons to purchase flood insurance. A mortgage company may also require a property owner to purchase a certain amount of flood insurance coverage. 

Buying flood insurance requires maintenance of reasonable flood standards. This can be too costly for some municipalities and is the reason flood insurance is not available in much of Puerto Rico. Instead, areas such as this rely heavily on federal aid under the Stafford Act and other programs. The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) is a United States federal law designed to bring an orderly and systematic means of federal natural disaster assistance for state and local governments in carrying out their responsibilities to aid citizens.

Another flood insurance option is the Write Your Own (WYO) program which began in 1983. This was a cooperative undertaking between the private insurance industry and FEMA which allows participating insurance companies to write and service the standard flood insurance policies (SFIP) in their own names. The federal government retains responsibility for underwriting all losses and will back all flood policy claim payments made by a WYO insurance company. A WYO insurance company is subject to NFIP rules and regulations.

A Standard Flood Insurance Policy (SFIP) is a single-peril (flood) policy that pays for direct physical damage to the insured property. Replacement cost is covered if certain conditions are met, otherwise the policy will pay actual cash value.  Under the NFIP these policies can be purchased through an insurance agent. The policy is then issued directly by the NFIP or by the participating WYO company. 

Coverage under an SFIP is very specific. Some exposures are only insured under certain circumstances and some are not covered at all (living expenses such as temporary housing), so read the fine print!  Also, SFIP coverage for building contents must be purchased separately.  The claim process is fairly standard - a loss is reported and an inspection is completed. The Proof of Loss (POL) is prepared and once the insured signs off, the claim is paid. An insured may qualify for an advance payment where the initial POL requirement is waived with the flood damage assessment report submitted instead.

Considering the costs associated with some of the recent significant floods in the US – since Hurricane Katrina in 2005, the NFIP has paid out over $47 billion in flood insurance claims - it was only a matter of time before reinsurance came into play.  Federal legislation in 2012 and 2014 granted FEMA authority to secure reinsurance from private reinsurers and capital markets. The NFIP reinsurance program helps FEMA manage future exposure of the flood program through transfer of risk to private reinsurers. Hurricane Harvey caused losses estimated at around $9 billion. Under the NFIP reinsurance program, FEMA recovered a little over $1 billion from private markets.