An 'equitable' alternative to NFIP's risk rating 2.0 construct
INSURANCE BUSINESS AMERICA
June 07, 2022
Bethan Moorcraft, of Insurance Business, sat down with Craig Poulton, CEO of Poulton Associates and owner of CATcoverage.com, to discuss the benefits of private flood insurance over the NFIP.
For Craig Poulton (pictured), CEO of Poulton Associates and owner of CATcoverage.com, a leading US flood insurance provider, not all flood insurance coverage is created equal. This was abundantly apparent when he was asked to address the upgraded risk assessment provided by the National Flood Insurance Program (NFIP) entitled Risk Rating 2.0 - Equity in Action.
Poulton was quick to point out that despite the recent risk rating upgrade, the Federal answer for flood coverage has some significant breaches in its flood insurance paradigm.
“Risk Rating 2.0 is an attempt to bring greater equity to the way the NFIP assesses risk and provides a rate for structures located in special flood hazard areas,” Poulton outlined.
“The Risk Rating 2.0 effort is scheduled to take a 10-year glide path to actuarily defensible rates for all structures insured by the NFIP, but if past is prologue, it is likely that they will not come close to achieving their goal,” he added.
The impetus behind the recent revamp, Poulton stated, was the Government’s recognition that the previous rating mechanism was unfair to millions of customers.
“For 40-plus years, they had been using it [the rating system] and when we created a report that pointed out many of its inequities, to their credit, they recognized that they needed to change to methodologies pioneered by our organization and other members of the private market,” Poulton said.
“We had a product that was earthquake centric, and since we charged for earthquake, we threw in flood and landslide essentially for free,” Poulton said. “At a certain point, we realized people were buying our product instead of the NFIP product in order to get the flood coverage.”
This is when Poulton began to realize that there might be an opportunity to “profitably compete with the NFIP, and often save consumers money in the process.”
“After some convincing, a few underwriters at Lloyd’s of London decided they were willing to engage with us in a purposeful effort to sell private flood coverage in flood zones and that was the beginning of competition with the NFIP on private primary flood [insurance] in the United States,” he said.
Holes in the flood risk foundation
Poulton pointed out that in its previous model, the NFIP took a structure that was located in a “Special Flood Hazard Area”, also known as the NFIP designated 100-year flood zone, and then this structure would receive a rate based on the flood zone rather than a more granular analysis.
“This is essentially a horizontal construct, the flood zone was a horizontal shape on the map,” Poulton described.
“Flooding is vertical in nature. It doesn’t care where you are horizontally, it only cares where you are vertically,” Poulton said. “If you’re in a low-lying area you’ll get flooded, and if you are a little higher you are less likely to get flooded, so the odds of you getting flooded go down as your elevation goes up.”
To be fair, Poulton pointed out, at the time that NFIP got off the ground during the 1970s geocoding and elevation studies were not as sophisticated when measured against today’s standards.
The main innovation of Risk Rating 2.0 boils down, Poulton noted, to the Federal Government’s use of better vertical assessment technologies.
“They have essentially adopted many of the methods we have been refining for years,” he explained. “You get the best data possible on the structure and then you assess the data, assign a rate and develop a premium, but there is a massive amount of latitude in the way that is all accomplished.”
One notable inequity in the NFIP’s implementation of Risk Rating 2.0 highlighted by Poulton was the decision “to wipe the slate clean and not take into account any previous losses” including on what are known as repetitive loss properties.
Until they experience their first post Risk Rating 2.0 claim, repetitive loss properties receive a far lower rate than their experience would dictate. After experiencing their first post NFIP Risk Rating 2.0 loss, their rate is increased to a more actuarially accurate level.
“This is a gift for repetitive loss property owners because they can now sell their home for a much higher price to someone who believes their artificially low flood insurance premium correlates to the property’s actual flood risk,” Poulton highlighted.
“On the other hand, this is a curse to the new property owner since their premium will increase dramatically after their first loss, and the price they can sell the home for will be reduced, some people might lose hundreds of thousands of dollars because of this inequity.”
“Because the NFIP refuses to make the claims history associated with NFIP insured structures publicly available, this facet of Risk Rating 2.0 seems particularly egregious.” Poulton summarized.
“Logically most of the people owning repetitive loss properties are likely to sell those properties this year, or maybe have already, because, from a practical standpoint, the person buying the house has no way of knowing that it is a repetitive loss property and that the rate will probably increase dramatically at some future time,” Poulton said.
“The seller is going to be very happy, but the buyer will likely suffer a serious financial blow at a future time.”
An equally glaring problem with Risk Rating 2.0 - Equity in Action, Poulton brought up, is that “it continues to charge rates that are not correlated with risk, so on average the rates will require taxpayers to shoulder about 40% of NFIP flood losses.”
Private risk coverage advantages
CATcoverage.com’s Natural Catastrophe Insurance Program is well-positioned to fill the holes in the NFIP flood wall due to its “gold standard” flood insurance policy form, its approach to more fully address flood risk, as well as its ability to take on insureds that will be looking at private alternatives to NFIP coverage and pricing.
“With Risk Rating 2.0 coming out, a lot of people’s premiums will change, and we expect a lot of people will call their insurance agent and ask for some alternatives,” Poulton predicted.
“Our rating methodology is different than the NFIP’s in several aspects, and a large subset of NFIP insureds will find a much better deal with us from both a coverage and a pricing standpoint,” he said. “At CATcoverage.com we are sometimes 30% or more below NFIP pricing.”
Flood risk moving forward
Relative to the advantages of the private coverage that CATcoverage.com can offer an insured, Poulton drew attention to the benefit of having coverage using generally accepted insurance language that expands the benefits to buyers.
“Our policy contains numerous coverage enhancements, for example, our form contemplates a waiting period of just 15 days instead of the 30 days found in NFIP policies, our definition of “flood” is significantly broader than that used by the NFIP,” Poulton explained.
“We cover a certain number of contents located in a basement while the NFIP does not. We will also cover multiple structures on one policy and they [the NFIP] still do not; in fact, we have published some of the major improvements our policy form provides in a comparison document which can be found on CATcoverage.com,” he added.
If you want to offer a strong alternative to the NFIP, visit CATcoverage.com and become a producer. Onboarding requires just a few minutes, is 100% online, and provides exclusive access to the Natural Catastrophe Insurance Program (NCIP).