Specialty Insurance

Reauthorization Looms for NFIP

Big storms add urgency to reforms on transparency and repeat claims.
By: | December 14, 2017 • 6 min read

In November, the U.S. House of Representatives voted to revamp the National Flood Insurance Program (NFIP).

While the Senate isn’t expected to pass its own revised version until sometime in 2018, the House version calls for greater private sector involvement in the writing of flood insurance and penalties for owners whose properties are the site of repeat flood claims.

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By one estimate, one percent of properties are responsible for 30 percent of all NFIP losses. Private insurers have long complained about a lack of transparency in pricing and transferring risk under the Federal program, which was founded some 50 years ago, because private sector insurers were unwilling to take on the risk.

Since the onslaught of Hurricanes Katrina and Rita in 2005, the program has struggled with debt. Congress in October forgave $16 billion in NFIP debt in an attempt to maintain the program in some state of viability.

According to Daniel Alpay, line underwriter, flood and household, Hiscox, the current situation with the NFIP is not dissimilar to the issues faced by the Terrorism Risk Insurance Act, another federally-backed insurance program.

“Both required reform, and both have experienced delays to reform with short-term extensions,” he said.

“We saw a few NFIP lapses and short-term extensions between 2008 and 2012, which led to mortgage market disruption and lenders demanding owners buy flood coverage for homes in high-risk areas, before the NFIP was finally re-authorized.”

Alpay added, “It’s anyone’s guess as to what will happen, but I would say it’s very possible that something similar [to what has happened before with NFIP] could happen again if there is still polarization in Congress.”

Access to Affordable Insurance

“Either way, consumers need clarity and access to affordable flood coverage as recent events have sadly highlighted,” he said. “There are too many consumers in the U.S. at risk of flood who are either not being adequately insured or else not being covered at all.”

Daniel Alpay, line underwriter, flood and household, Hiscox

Achieving bipartisan support is challenging, “but at the end of the day, U.S. citizens need to have sufficient access to affordable flood insurance,” Alpay said.

“The NFIP has played an important part in offering flood coverage to U.S. homeowners and businesses, but it is not sufficient on its own. It requires reform; it is no longer the self-sufficient insurance program that it was set up to be, given it is $25 billion plus in debt.”

Neal Conolly, now a director at ratings company Clearsurance, was the president of Wright Flood, the largest underwriter in the NFIP, until last year. He noted the October $16 billion loan forgiveness by Congress. That relief, plus a $22 billion line of credit at the Treasury, means there is “no financial issue continuing for NFIP.”

“Historically, the program was in balance for most of its 40 years of existence,” said Conolly.

“It was two storms, $17 billion of insured losses from Katrina and $7 billion from Sandy” that put the program under water.

He added that preliminary figures from Harvey will surpass Sandy with $10 billion in insured losses. Irma will be smaller at about $3 billion.

As important as those losses are, Conolly stressed a much larger point: “Coastal development generates half a trillion dollars in economic activity.”

That important economic engine would falter if the program were to be sharply curtailed. Instead he expects NFIP to be tweaked.

However, recent events “confirm that the U.S. flood risk is greater than the NFIP currently caters for or has the appetite to cater for,” said Alpay.

Public-Private Partnerships

“I don’t believe it can continue in its current form, but I do believe there is a role for the private flood insurance market. There are lots of examples where the public and private sectors have worked together, and this issue is too important for us not to.

“Flood is the most frequent natural disaster in the U.S., yet sadly 95 percent of all residential properties are currently uninsured.”

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In the past, flood was considered an uninsurable risk for private market insurers, but that may not be the case anymore thanks to improved modeling granularity, computational power and higher-resolution data.

Alpay said Hiscox has invested heavily in understanding and pricing U.S. flood, which is an extremely data-driven process.

“We have built a suite of flood insurance and reinsurance provisions,” he said.

“We have worked with independent hydrological model specialists, [and used] global imaging satellites and remote sensing experts to develop the underwriting platform. It has been peer-reviewed and approved by independent actuarial consultants.”

That said, private insurers such as Hiscox are not involved directly in efforts to reform the NFIP. Those are being led by political and academic groups.

“What we are doing is helping to raise awareness among consumers of the flood risk in so-called non-mandatory flood zones,” said Alpay. Several public policy associations have published analyses and position papers on NFIP reform, including the American Academy of Actuaries (AAA) and the National Association of Insurance Commissioners.

“NFIP is more than just profit and loss. It affects building codes, land use, mapping and funding.” — Rade Musulin, vice president of casualty, AAA

Rade Musulin, vice president of casualty, AAA said, “The program clearly has seen some problems, but NFIP is more than just profit and loss. It affects building codes, land use, mapping and funding.”

Climate change has become the major new variable in the equation, and Musulin does not dispute that.

Modern Risk Assessing Technologies

He hastened to add, “the key point to remember is that the technology around assessing risk is changing rapidly. That is what is opening opportunities for the private sector and is a key driver for revisiting the program. There were many strong reasons it was formed in the ’60s. But now we have CAT models, GPS mapping and big data. Flood risk may have been underestimated in some areas.”

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Advances in technology make underwriting and pricing risk more accurate and thus more palatable to the private sector.

“There are some provisions in the reform proposals that direct NFIP to release data,” said Todd Kozikowski, co-founder and chief revenue officer, Clearsurance.

“That includes loss data. NFIP has resisted this because the fear is that the private sector will cherry-pick the best or mispriced risks.”

He added that this is likely to happen to some degree, but the greater good of the competition will be a better differentiation of the risks, including inland from coastal.

Other sources have even suggested that the private sector cherry-picking the best business will then force higher deductions and premiums on the repetitive loss properties. Thus, either enforcing proper pricing on the risk or driving those properties out of the program.

The other technological development being brought to bear is crowdsourcing reviews.  Whether properties are FIP or privately insured, Kozikowski said,

“The mission is for insureds to make smarter decisions. We found that legacy reviews were 70 to 80 percent negative, which means they were not really helpful. People only reviewed when they had a complaint. Since we started our reviews, the same percentages are now positive.”

Carriers and brokers pay for granular Clearsurance surveys; insureds do not pay to make reviews. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Absence Management

Establishing Balance With Volunteers

It’s good business to allow job-leave for volunteer emergency responders, whether or not state laws apply.
By: | January 10, 2018 • 7 min read

If 2017 had a moniker, it might be “the year of the natural disasters,” thanks to a phenomenal array of catastrophic or severe events— hurricanes, tornadoes, wildfires, ice storms and floods.

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Combined with smaller-scale fires and other emergencies, these incidents tax the resources of local and state emergency services, often prompting the need to call volunteer emergency responders into action.

But as lean as most organizations are already running, volunteer activities can sometimes cause friction between employees and employers. Handling conflicts the wrong way can potentially lead to legal headaches, harm employee morale and batter a company’s reputation.

State by State Variations

Most employers are aware of the various federal and state leave laws protecting their employees, including family and medical leave, pregnancy leave and military leave. But leave laws that protect the livelihoods of volunteer emergency responders are more likely to fly under the radar of some HR managers and risk managers.

Such laws don’t exist in every state, but more than 20 states do have some type of law in place to protect volunteers including emergency responders, firefighters, disaster workers, medical responders, ambulance drivers or peace officers.

Marti Cardi, vice president of Product Compliance for Matrix Absence Management

The laws vary broadly. Nearly all specify that such leave be unpaid, and that employees disclose their volunteer status to employers and provide documentation for each leave. But there is a spectrum of variations in terms of what may trigger an eligible leave. Some, for instance, apply for any emergency that prompts a call from the volunteer’s affiliated responder group. Others may require a government declaration of emergency for the law to be triggered.

While many of the laws do not explicitly require employers to let employees leave work when called to an emergency during a shift, most specify that an employee may be late or even miss work entirely without facing termination or any other adverse employment action.

Some states mandate a maximum number of unpaid leave days that a volunteer can claim. But others may place more significant burdens on employers. In California, for instance, employers with 50 or more employees are required to grant up to 14 days of unpaid leave for training activities in addition to any leave taken to respond to emergency events. For multistate employers, keeping on top of what obligations may apply in each circumstance can be a challenge.

Significant Risks

Large or mid-sized employers may rely on absence management providers to keep them in compliance. For smaller employers though, it may be as simple as looking up a state’s law via Google to find out what’s required. However, checking in with the state department of labor or the company’s attorney may be the best way to get the correct facts.

“I would caution that just because you don’t find something [on the internet], it doesn’t mean it’s not there,” said absence management and employment law attorney Marti Cardi, vice president of Product Compliance for Matrix Absence Management.

For example, Cardi said, an obscure Texas law provides job-protected leave for volunteer ham radio operators called into service during an emergency.

Cardi said employers should task HR to investigate the laws in each state the company operates in, and to ensure that supervisors are educated about the existence of these laws.

“If a supervisor is told by one of his or her employees, ‘Sorry I’m not coming in today … I’ve been called to volunteer firefighter duty for the [nearby region] fire,’” she said, you want to be sure that the supervisor knows not to take action against the employee, and to contact HR for guidance.

“Training supervisors to be aware of this kind of absence is really important.”

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An employer that does terminate a protected volunteer for responding to an emergency may be ordered to pay back wages and reinstate the employee. In some cases, the employee may also be able to sue for wrongful termination.

And of course, “you don’t want to be the company in the headlines that is getting sued because you fired the volunteer firefighter,” she added.

If an employer bars a volunteer from responding, the worst-case scenario may be a third-party claim. Failure to comply with the law could give rise to a claim along the lines of “‘If you had complied with your statutory obligation to give Jane Doe time to respond, my loved one would not have died,’” explained Philadelphia-based Jonathan Segal, partner at law firm Duane Morris and managing principal of the Duane Morris Institute.

“That’s the claim I think is the largest in terms of legal risk.”

Even if no one dies or is seriously injured, he added, “there could still be significant reputational risk if an individual were to go to the media and say, ‘Look, I got called by the fire department and I wasn’t allowed to go.’”

The Right Thing to Do

What employers should be thinking about, Segal said, is that whether or not you have a legal obligation to provide job-protected leave for volunteer responders, “there’s still the question of what are the consequences if you don’t?”

Employee morale should be factored in, he said. The last thing any company wants is for employees to perceive it as insensitive to their interests or the interests of the community at large.

“Sometimes employers need to go beyond the law, and this is one of those times,” — Jonathan Segal, partner, Duane Morris; managing principal, Duane Morris Institute

“How is this going to resonate with my employees, with my workforce, how are people going to see this? These are all relevant factors to consider,” he said.

There’s an argument to be made for employers to look at the bigger picture when it comes to any volunteer responders on their payroll, said Segal.

“Sometimes employers need to go beyond the law, and this is one of those times,” he said. “Think about the case where’s there’s not a specific state law [for emergency responders] and you say to a volunteer, ‘No, you can’t leave to deal with this fire’ and then people die. You as an employer have potentially played a role, indirectly, because you didn’t allow the first responder or responders to go,” he said.

The bottom line is that “it’s the right thing to do, even if it’s not required by law,” agreed Cardi.

“I feel that companies should have a policy that they’re not going to discipline or discharge someone for absences due to this kind of civic service, subject to verification of course.”

Clear Policy

While most employers do strive to be good corporate citizens, it goes without question that employers need to guard their own interests. It’s not especially likely that volunteer responders will try to take advantage of the unpaid leave allowed them, but of course, it could happen.

That’s why it’s important to have policies that are aligned with state laws. Those policies could include:

  • Notifying the company of any volunteer affiliations either upon hire or as soon they are activated as volunteers.
  • Requiring that employees notify a supervisor as soon as possible if called to an emergency (state requirements vary).
  • Requiring documentation after the event from the head of the entity supervising the volunteer’s activities.

If at some point it becomes excessive – someone has responded to emergencies five times in nine weeks, then it’s time to examine the specifics of the law and have a discussion with the employee about what’s reasonable, said Segal. It may also be time to ask specifics about whether the person is volunteering each time, or are they being called.

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In some cases, the discussion may need to be about finding a middle ground, especially if an employee has taken on an excessively demanding volunteer role.

“We encourage volunteers to pick the style that best fits their schedule,” said Greta Gustafson, a representative of the American Red Cross. “Disaster volunteers can elect to respond to disasters locally, nationally, or even virtually, and each assignment varies in length — from responding overnight to a home fire in your community to deploying across the country for several weeks following a hurricane.

“The Red Cross encourages all volunteers to talk with their employers to determine their availability and to communicate this with their local Red Cross chapter.”

Segal suggests approaching it as an interactive dialogue — borrowing from the ADA. “Employers may need to open a discussion along the lines of ‘I need you here this week because this week we have a deliverable on Friday and you’re critical to that client deliverable,’” he said, but also identify when the employee’s absence would be less critical.

No doubt there will be tough calls. An employer may have its hands full just trying to meet basic customer needs and need all hands on deck.

“That may be a situation where you say, ‘First let me check the law,’” said Segal. If there’s a leave law that applies, “then I’m going to need to comply with it. If there’s not, then you may need to balance competing interests and say, ‘We need you here.’” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]