New Regulation: More Private Flood Insurance Competition?

As Congress continues to debate comprehensive reform of the National Flood Insurance Program (NFIP), federal banking regulators have publish a final joint regulation allowing for broader acceptance of private flood insurance policies.

The National Flood Insurance Act of 1968 made federally subsidized flood insurance available through the National Flood Insurance Program (NFIP) to cover gaps left by the withdrawal by private insurers from the flood insurance market. The Flood Disaster Protection Act of 1973 required property owners in Special Flood Hazard Areas to purchase flood insurance when purchasing a mortgage originated, guaranteed, or purchased by a federal agency, federally-regulated lender, or Fannie Mae/Freddie Mac.


In recent years, private insurers have expressed renewed interest in providing flood coverage, due to advances in flood risk quantification and increases in capital market capacities. However, few private insurers can compete with the NFIP, which offers cheap subsidized rates but has had to borrow $30 billion from the government to pay for its claims from flood disasters like Katrina, Sandy, and Harvey. Private insurers currently are estimated to issue only 3.5 percent to 4.5 percent of all U.S. residential flood policies.

In an effort to enhance private flood insurance competition, Congress passed the 2012 Biggert-Waters Act, which require that federally regulated lenders accept private flood insurance as defined in the Act. On February 12, federal banking regulators (the OCC, the Federal Reserve Board, the FDIC, the Farm Credit Administration, and the National Credit Union Administration) publish a joint proposed rule to implement this law.

Here are some of the Rule’s highlights:


Federally regulated lenders must accept private flood insurance policies providing coverage that is “at least as broad” as the coverage provided under a Standard Flood Insurance policy (SFIP) issued under the NFIP for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer.

Some commenters on the proposed rule asked whether policies with anti-concurrent causation clauses would be considered “at least as broad” as an SFIP, meaning that they qualify as “private flood insurance” that must be accepted by lenders. Anti-concurrent causation clauses provide that if a loss is caused by two perils (such as wind and flooding), one of which is excluded and one of which is covered, the loss is not covered. The regulators responded that the SFIP includes what is effectively an anti-concurrent clause and that as long as the private policy’s anti-concurrent causation clause excludes losses to not a greater degree than an SFIP that it qualifies as a private insurance policy.


To assist smaller lenders that often were confused by the statutory definition of private flood insurance, the Rule provides for a “streamlined compliance aid provision” that allows lenders to determine, without further review, that a policy meets the definition if the policy (or an endorsement) contains the following language: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”


Significantly, the Rule has a discretionary acceptance provision that allows lenders to accept policies that don’t meet the strict statutory definition of private flood insurance, so long as they provide sufficient protection for a designated loan, are consistent with general safety and soundness principles, and the lender documents its conclusion regarding the sufficiency of the protection in writing.


The Rule also allows lenders to accept, under certain conditions, private flood coverage issued by mutual aid societies, under which members share a common religious, charitable, education or fraternal bond.


The Rule does not address the issue of continuous coverage, which the NFIP considers when determining flood insurance rates. Since the NFIP does not officially recognize private flood policies, it considers anyone who leaves the program to purchase a private policy to have had a gap in coverage, which could affect their rates if the homeowner later decides to return to the NFIP. The National Association of Realtors® (NAR) states on its website that it will be following up with the regulators on this and other issues, such as whether surplus lines residential coverage is included.

Enhanced private competition could provide more flexible flood policies, lower costs for some homeowners, and reduce the NFIB’s financial risk after major disasters. This Rule—which takes effect July 1, 2019—is a first step towards expanded lender acceptance of private flood insurance policies, which should be a boost to the growing private flood insurance market.