HFIAA is still undergoing initial phases of implementation, but the latest flood insurance law has already had a dramatic impact on the market.

As the changes continue to pile up, how will the burgeoning private flood market respond?

“These changes are spurring private capital markets to look at flood differently and to think about ways they can come in and not only offer flood insurance profitably, but also provide a savings to homeowners,” says John Dickson, president, Advanced Insurance Coverages Inc., a unit of National Flood Services. “From an industry standpoint, from a private capital market standpoint and ultimately from a homeowners standpoint, this is a good thing.”

The Path to Private

Bruce Bender, specialist in outreach and risk communication services and a national consultant for FEMA’s FloodSmart marketing campaign and Risk MAP effort, first started tracking private flood markets back in 1998. Since then, “the number of markets has actually increased,” he notes.

At this year’s National Flood Conference, Bender spoke with Lloyd’s brokers and other companies about a “marked increase” in industry interest in exploring private market options for flood insurance. In fact, during the last day of the conference, one WYO vendor announced a new private product targeting Zone A that offers “a simpler app, higher limits and additional coverages,” Bender says. “And there seem to be other companies in the wings waiting.”

Up until Biggert-Waters, private flood markets struggled to compete with the NFIP. “Private markets don’t have taxpayers as a backstop to bail out their programs if they take too much risk or price them incorrectly,” Dickson says. “They have to be thoughtful and disciplined in how they allocate and deploy their capital. If they miss, their companies suffer, their shareholders suffer and ultimately their insureds suffer.”

But the federal program’s movement toward full-risk rates opens the door for private markets to offer more competitive pricing: Although HFIAA slows the rate increases mandated by Biggert-Waters, it doesn’t stop them completely.

“Heavy federal subsidization of flood insurance rates has made it very difficult for private markets to compete and offer alternatives for customers,” Dickson says. “The plan HFIAA set is a continuum, meaning these changes are going to happen incrementally over time. Every time a change occurs, there’s going to be an opportunity for private to think about expanding the footprint of where they want to write this business and provide consumers options they don’t necessarily have today.”

Dickson adds that a number of existing private flood programs are doing “very well” in today’s environment. “If you rewind the clock 15, 20 years, there was really only one option for primary flood insurance, and that was the NFIP,” he says. “That’s not today. To best serve their customers and to deliver the best experience, agents need to explore these options.”

What’s Next?

Considering the insurance industry hasn’t experienced a major natural disaster since Superstorm Sandy in 2012, the ability of all private flood markets to survive a major cat remains a question mark.

“One of the biggest concerns is always ‘Disaster today, gone tomorrow,’” Bender says, noting that when he managed a WYO company, he ran into a competitor that boasted cheaper rates—but ended up pulling out of the market the year after a big storm hit Louisiana.

Dickson agrees that not every private flood option has the same capital structure—which makes the role of the agent that much more important when it comes to helping clients select a private flood carrier with sound pricing, broad distribution and high-quality customer support.

“It’s very important for the agents to understand not just the savings to the customer, but what that savings represents,” Dickson points out. “Does that savings represent a restriction of coverage that’s going to potentially leave their customer exposed? Does that savings represent a poorly capitalized outfit that may not be here when a flood occurs? Does this mean they’re going with a regional company that could be severely impacted if there’s a significant event in that region?”

As HFIAA continues to increase rates under the NFIP, should agents and their clients expect private markets to continue expanding their influence? “I don’t think the federal program ever evaporates completely,” Dickson says, citing former NFIP head Brad Kieserman’s opinion that the federal program should consider moving from trying to be an insurance company to becoming a social program.

“That’s the end state for the NFIP and FEMA—to provide social assistance for customers that need to maintain the value of their home, their most prized possession,” Dickson says. “But for those homes that have an appropriate risk profile, private markets represent a very, very compelling option.”

As pre-FIRM premiums continue to rise and the NFIP becomes more and more complicated—Bender says FEMA added around 20 new questions to the flood insurance application this fall—“you’re going to see more and more companies entertaining that idea of coming up with a private solution, whether it’s on their paper, whether it’s excess and surplus lines or whether they market a Lloyd’s program,” he says.

The downside? “That’s less funding to the NFIP,” Bender points out. “And that national flood insurance fund provides funding to programs like the mapping program. So reduced funds could have an impact on the NFIP indirectly.”

Jacquelyn Connelly is IA senior editor.