Filling Virginia’s Flood Insurance Gap

by Lisa Miller

A new Federal Emergency Management Agency report is shocking: 69% of Virginia homes in high risk flood zones do not have flood insurance. Another report reveals 17% of Virginia properties should be listed in high risk zones – but are not. Congress’s continued failure to reform an increasingly expensive National Flood Insurance Program (NFIP), coupled with last year’s record-setting floods and now Hurricanes Michael and Florence, has created an urgent need to improve the availability and affordability of flood insurance. The Virginia General Assembly and legislatures in other states can help address this dangerous situation by encouraging a larger private flood insurance market.

There is only one private insurance company writing primary flood insurance in Virginia, defined as up to $250,000 in coverage. Although 106,000 Virginians have NFIP coverage, FEMA’s report, “An Affordability Framework for the National Flood Insurance Program,” found that only residents with higher incomes are buying it, leaving an ever-growing majority of others unprotected.  While FEMA studies the situation, the private market is moving ahead and delivering more affordable flood insurance where it can.

New catastrophe models are allowing insurance companies to better understand risk and thus accurately price flood premiums – down to the individual property – providing greater consumer choice and alternatives to the federal NFIP. When state government encourages it, a vibrant, competitive environment emerges as it has in Florida where, in just 3 years, almost 30 companies are offering better coverage at a cheaper price. In Miami-Dade County, ground zero for Hurricane Andrew in 1992, one private insurer’s average premium is $677 compared to the NFIP’s $980 average.

Catastrophe models, model law. The use of catastrophe models in setting rates isn’t new. But it’s usually used together with claims data, something the NFIP hasn’t been willing to share, citing privacy concerns. Also, greater consistency is needed among individual state insurance departments on how catastrophe models may be used in submitting rates.

The National Conference of Insurance Legislators (NCOIL) has begun reviewing a simple two-page proposed draft law, based on Florida’s, whose concept is, “If you build it, they will come.” The draft law permits companies, as an example, to test market rates in order to promote competition and choice, with the regulator approving policy language if a state requires a review (some do not) to ensure policies meet or exceed NFIP coverage.

The model law also ensures that insurance agents educate consumers about the dangers of going without coverage, and that insurance commissioners certify that policies are adequate to meet mortgage banking requirements. The safeguards in this simple model law will reduce our reliance on federal flood insurance.

Some in the insurance industry are concerned that this proposed regulation is overreaching or unnecessary. It is nonetheless designed to provide suggestions to regulators and those regulated on how to work together to launch and grow a successful market. What isn’t in dispute is private flood coverage’s cost savings, improved benefits, and greater consumer choice.

Start the conversation. NFIP premiums are rising an average of 8% this year but in some areas by 18%,the maximum annual increase allowed under law. So it just makes sense for state legislators and regulators to begin the conversation to fast-track the growth of a private market, which has the added benefit of spreading the risk to private insurers and away from U.S. taxpayers.

Too many Virginians are unprotected from the hazards of flood waters. There’s an urgent need to improve the availability and affordability of flood insurance so more homeowners are able to buy protection for their property and families. While Congressional paralysis stymies needed NFIP reforms, we must work toward model private flood insurance legislation to let Washington know “we got this.”

Lisa Miller is a former Florida Deputy Insurance Commissioner who served as an advisor on passage of Florida’s key laws encouraging a vibrant private flood insurance market. She is CEO of Lisa Miller & Associates, a Tallahassee, Florida-based consulting firm. @LisaMillerAssoc

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9 responses to “Filling Virginia’s Flood Insurance Gap

  1. People make choices, often bad ones. I took a quick glance at the draft statute and didn’t see red flags, but I didn’t read it closely and its not my field. All fine as long as “encourage” doesn’t really mean “subsidize.” But of course the whole idea of insurance works best when all those at risk are paying in, not just the smart or rich ones. Likewise when there is a pool of underwriters, not just one or two.

  2. Why does there need to be a NFIP at all? If you can’t afford pribvate sector insurance for your house in a flood prone area – don’t own a house in a flood prone area.

  3. All insurance should be actuarially priced. NFIP is not. Failing to do so introduces moral hazard and explicit subsidies for some not based on need.

  4. re: moral hazard and ” If you can’t afford pribvate sector insurance for your house in a flood prone area – don’t own a house in a flood prone area.”

    yes… for all the talk about making people responsible for their choices that impact their health insurance – this seems even “more” an issue but if Global Warming and increasing storm frequency/intensity and flooding are real then what should we do with respect to choices people make about where to live?

    this is not an idle question when we look at place like coastal Virginia and NC, Nags Head, etc… those regions have attracted great numbers of people and property owners wanting to be near the coast.

    Do we now say – “you are on your own with regard to insurance”? I don’t know how much money we are talking about but I bet it’s in the billions and up.

    We may be seeing the beginning on an era where only the uber rich can afford to live on the coasts but we can also bet that the Uber rich will find friends in the General Assembly.

  5. Larry, what are you saying? Are you saying because of global warming we should subsidize people building or buying in vulnerable areas? Or because it has been subsidized in the past, we need to continue despite the bad incentive that provides?

  6. Izzo – no. I’m not in favor of moral hazard at all.. and I’m not a fan of the Federal subsidized flood program except in one narrow sense in that for those who do want to leave that they get one bite at the apple – and then they do leave and that help should be means-tested and capped so as to help those who would be financially wiped out if they were forced into staying no matter what.

    I could even be talked out of that but the bigger point I’m making here is that we have encouraged people to build in risky areas to start with and that’s been a mistake but now it’s turning into more than a “cost” mistake but a catastrophe mistake in that we’re talking about places who depending on property taxes to provide services and infrastructure and if those properties go belly up in large numbers.. it’s going to look a lot like Detroit.

    Could Nags Head go bankrupt because we change the way flood insurance works?

    Are we prepared to see places like Nags Head go broke and billions of dollars of wealth lost to thousands of people?

  7. “If you find yourself in a whole, the first thing to do is stop digging.” — Will Rogers

  8. Oh we agree but we’re talking about people – up and down the coasts that love their waterfront properties… and so they do build and the localities provide the roads and water and sewer…. and they like the taxes that pay for the infrastructure… and schools … so I just don’t see many of them subscribing to Will Rodgers wisdom.

    If Congress actually kills the FEMA flood insurance program or just requires it to be actuarially sound it will pretty much doom most development except for the uber rich.

  9. Larry, I get the politics of it, but at some point in time that collides with the economics of it and passes the bill to future generations who have to pay people who built where they shouldn’t have built, including the uber rich. At least the uber rich would have to self-insure.

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