Flood insurance has become, for many, the coverage they love to hate and can’t live without. If you live in a flood zone and have a mortgage or home equity line of credit, your bank will require you to have the coverage. If you don’t have a mortgage, you won’t be required to carry the coverage, but you should.
The National Flood Insurance Program (NFIP) has come under fire for the limits of coverage that most insureds were unaware of, as well as the process for filing claims. And after Hurricane Katrina and Superstorm Sandy, the program is deeply in debt. NFIP is scheduled to expire Sept. 30, 2017, and many industry groups are urging Congress to reform the program, expanding options for private flood insurance.
Golden Bear Insurance, based in Stockton, Calif., is one company that is venturing into the private flood insurance market. The California Department of Insurance (DOI) recently approved Golden Bear’s flood program as the first offering in the state that’s not from NFIP.
PC360 spoke with Michael Brown, vice president at Golden Bear Insurance, about private flood insurance and the company’s program.
PC360: What was the process like for Golden Bear to be approved in California to offer private flood insurance?
Brown: It was very much the same as getting any other line of business approved. We had to submit all of the coverage forms, our ratings plan and eligibility characteristics. Additionally, we had to outline the nature of our reinsurance, who our reinsurance partner is, and give the DOI a chance to vet our partners’ financial status in addition to ours.
Then we gave their team the opportunity to review the rate, review the forms and come back to us with any questions or concerns that they had from a consumer advocate standpoint.
In this particular case, they accepted everything we filed without any questions or push-back. They were very happy with everything we put together.
Using data, mapping and modeling software
PC360: Can you elaborate on how the data, mapping and modeling software that private insurers are using to help determine accurate rates?
Brown: When you purchase a flood policy from the National Flood Insurance Program, you’re given a rate based primarily on your FEMA [Federal Emergency Management Agency] flood zone — flood zone A, B, C, X, X500…there’s a bunch of them — and not much else. They do take into account whether your property is elevated above the base flood level, but the premium is primarily driven by the letter grade of your flood zone.
In our case, we take a step further. We start with the FEMA flood zone and use it as a means of sorting risks — higher hazard to lower hazard. Then we look at the specific property address so we can consider variables like elevation at that particular site, the topography and the nearest water sources, and base our rates on that more granular detail.
If there are two very similar homes, both in flood zone X in the same community, they might have very different rates if one of them is 10 feet higher in elevation because it’s up on the hill a bit. However, with FEMA’s broad brush approach, both of those properties are in flood zone X, so they’d both get the same base rate.
PC360: How will Golden Bear sell its private flood insurance coverage?
Brown: We have appointed two wholesale brokers — MJ Hall and Company, and Abacus Insurance in Southern California — who administer the program for us and solicit applications. They will be approaching the retail agents that they have relationships with, promote the availability of the product and send submissions into us. We at Golden Bear will do all the underwriting, pricing and policy servicing. We’ve engaged the services of a few select top quality organizations to help get the word out and approach our markets for us.
Focus on low to moderate hazard customers
PC360: How do you think the market will respond? How will you explain the need for flood insurance to potential customers who may not think they need it or whose mortgage companies don’t require it?
Brown: We are still very much in the infancy of the program. Abacus, one of our two distribution networks has not gone live yet. They are still programming the flood portal on their web-based platform. MJ Hall has just started test marketing the product with some of their top agents.
We’ve thus far seen strong interest, which is quite encouraging, but we are giving ourselves a soft, introductory period to make sure we have all of the kinks worked out on our end. That way we can track the business and respond quickly, handle each issue as it comes up before we open the (pardon the pun) floodgates, and become inundated with business. But the response has been very good. Rates across the low to moderate hazard exposures are generally lower than the flood program.
By virtue of being a public insurance product, the NFIP has a hard time saying no to anybody. There are few cases in which the NFIP would not make an offer of flood insurance. They do also face pressure to keep the premiums reasonable from the consumer perspective. In turn, there are cases in which they may undercharge the highest hazard customers and give a higher charge to the lowest hazard customers, trying to find the sweet spot in the middle.
Because we are a private entity, we don’t have that obligation to insure everybody. We’ve set our sights on the low to moderate hazard consumer where we feel like the flood insurance program isn’t necessarily serving their needs as well as they might. That allows us to price more competitively. If your particular house is at low flood hazard you should pay a low flood premium. With the flood insurance plan, there is always a little load that is put on those lowest hazard clients to absorb some of the subsidy that’s given to the higher hazard. We choose not to insure the highest hazard customers so we don’t have to absorb that extra exposure.
PC360: How does private flood insurance compare to federal program? Why would a buyer choose private over NFIP — assuming both are available?
Brown: The NFIP is fairly restrictive; they have a low maximum limit per building. Which is, in a lot of communities especially here in California, not going to allow you to purchase the full value of your home in flood insurance — only a piece of it. They also have limited contents coverage and don’t offer loss of use coverage at all.
Golden Bear’s policy offers up to $2million in building limits, up to $500,000 for contents and $5,000 for loss of use in every policy. If you have to move out of your house for a period of time due to a flood, the policy provides you $5,000 to help with the additional housing costs you’ll pickup during that time.
We also offer a range of deductibles from $500 up to $10,000. The higher the deductible, the lower the premium, so it allows the insureds to decide for themselves which is more important to them: a low deductible or the lowest possible premium. With private flood insurance the ceiling is higher, the walls are farther apart, it’s much broader coverage and much more customization than the federal insurance program.
PC360: If an insured is signing up with the NFIP, don’t they have a range of deductibles they can chose from?
Brown: They do, but there aren’t as many options; it’s not a broad range. It’s important to remember the NFIP’s purpose. Not unlike the California Earthquake Authority that was put in place after the Northridge Earthquake in Los Angeles, the NFIP was created to respond to a generalized public need. When it was authorized in 1968, it was hard for communities that needed flood insurance to get it. If there wasn’t a history of floods in your area, insurance companies would offer you coverage. But floods were happening all over. The NFIP came in and offered products that would allow people to get access to some kind of insurance coverage.
The NFIP is not a bad program. It served its purpose and does fill a need, but overall, government-sponsored insurance programs really should be markets of last resort. The private insurance industry should absorb the ordinary day-to-day risks, and the government should step in only for those risks that can’t be insured in an economically viable way.
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