The Housing and Urban Development Department (HUD) has opened up an option for more mortgage borrowers in special flood hazard areas (SFHAs) to access the private flood insurance market. While a welcome change, the timing is “lousy” according to a private flood insurance boss.
Previously, Federal Housing Administration (FHA) insured mortgage holders in SFHAs were compelled to obtain flood insurance through the National Flood Insurance Program (NFIP) under the Flood Disaster Protection Act (1973). Following the changes, they will have the option to access the private flood insurance market.
This will “finally allow FHA insured borrowers freedom of choice”, according to Craig Poulton, CEO of Poulton Associates and owner of CATCoverage, but the timing could be better. It comes as America faces a mortgage slump, with mortgage application pace reportedly at its lowest since 1997 as of October, according to the Mortgage Bankers Association.
“The vast majority of times the private market only picks up a flood insurance policy when a new owner is created, or a new mortgage is created; it might be a refinanced mortgage, it might be a new owner situation, or if a new structure is created,” Poulton said.
“That’s when we get an at-bat – that’s when we get a chance to prove our value, and we win the vast majority of those, in our case.”
Another factor that could drive lower take up, according to Poulton, is that producers may not “even have a private market option”.
The FHA update comes after a 2014 amendment to the Biggert-Waters Act (2012), which required the acceptance of private flood insurance for SFHA borrowers by mortgage lenders. Changes went live in 2019, but FHA-insured mortgages were not captured in the legislation.
“The FHA’s policy change would have had a more dramatic effect during the last six years than it probably will in the future six years, because the number of newly created mortgages and new owners is dramatically reduced right now and probably will be for at least a couple of years,” Poulton said.
There could be up to 600,000 FHA backed homes in SFHAs, according to “back of the napkin calculations” by Poulton. However, the insurance boss said he was skeptical that more than 10% of these would be looking to the private flood market any time soon.
“Out of that 600,000 homes there will be something like 60,000 homes that will probably be anxious enough about their premium that they’ll go shopping and try and find a better deal in the private marketplace,” Poulton said.
“Right now, it’s hard to find a significantly better deal for a lot of folks because the NFIP is still on risk rating 1.0 for much of its renewal book.”
The NFIP started rolling out FEMA’s risk rating 2.0 in October 2021, with the new system starting to be applied to renewals from last April. The changes have faced criticism for making flood insurance more expensive, but Poulton has alleged that the NFIP could be impeding access to the private flood market through rate inadequacies and a refusal to return mid-term cancellation premiums.
Net written premium for the private flood insurance market sat at $506.8 million for 2021, according to analysis by the Insurance Information Institute (Triple-I).
According to Triple-I, the top five writers of flood insurance by direct written premium in 2021 were:
There were just under 4.8 million NFIP policies in force as of June 30, 2022, according to FEMA, with $1.3 trillion in total coverage.
At the time, the scheme had capacity of $18.5 billion to pay claims, with $20.5 billion of outstanding Treasury debt.
NFIP premiums collected for the year ending September 30, 2022, sat at $3.2 billion, according to a Department of Homeland Security (DHS) financial report. The scheme had insurance liabilities of $5.8 billion, up from $3.4 billion for the same period in 2021.
The organization saw its incurred claims losses increase, which the DHS said was “largely the result” of hurricane Ian’s impact on Florida and the Carolinas.
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