NFIP has been temporarily extended to May 31, 2012. The House and Senate have different views about a longer term extension, which will need to be reconciled. Both Chambers know this needs to get done, but whether they will march two by two to do it remains to be seen. Some basic information about the NFIP, follows some of the general differences in approach of each Chamber, or its leadership, at the end of 2011.
Some changes that were reflected in Senate Bills:
Mandatory Escrow/Penalties: Require both Federal and State chartered banks to escrow for properties in mandatory purchase areas and would increase lender penalties from $350 to $500 per violation, without aggregate cap.
Mandatory Purchase Area: Will include residual risk areas.
Multifamily Residential Coverage: Multifamily (4 or more) residential properties would be permitted to purchase flood insurance.
RESPA/500 Year Flood Plain Notice: Mortgagees would need to provide RESPA notice of the availability of flood insurance even i if if the property was not in a special flood hazard area. Notice must be given to mortgagor/lessee within a 500 Year Flood Plain. Coverage is not mandatory within the 500 Year Flood Plain area.
Subsidized Property Rate Increase Phase-In: 4 year phase-in of actuarial rates for some subsidized properties (i.e., second homes; business property; SRL property).
Annual Premium Increase Limit: Annual premium increase limit raised from 10% to 15%. Premium adjustment 4 year phase-in (40% 1st year; 20% each of 2nd-4th years for remapped properties).
Minimum Deductibles: Minimum Deductibles for subsidized properties ($1500- $100,000 or less insured; $2000 > $100,000 insured) and non-subsidized properties ($1000- $100,000 or less; $1250- >$100,000).
Catastrophe Reserves: 1% of total exposure on outstanding policies, 7.5% of which FEMA must place into a fund until the 1% ratio is fully funded.
Condomimum Owner Coverage: Condo owner claims are fully covered even if condo association is underinsured.
Some changes as reflected in House Bill:
Local Government Deferral of Mandatory Coverage: Local government in a) areas where there was no prior flood hazard (i.e., those areas remapped); b) in areas where flood controls are being improved; and c) and those who have filed a Section 1363 appeal, could delay for a period of 12-36 months, mandatory flood insurance on property for which there is a completely new mortgage origination after the effective date of the law. This would not be applicable to CEMAs and lenders could still require it on existing or new mortgage on improved real estate/mobile home. No refund of premiums would be required on subject properties.
Forced Placed Insurance: Refund of forced placed insurance premiums and related fees for any overlap period, within 30 days of confirmation of mortgagor’s State permitted private flood insurance. Confirmation could be the policy Declarations page and would need to have contact information about the placing producer.
Minimum Deductibles: $2000 for subsidized properties; $1000 non-subsidized properties.
Multifamily Residential Coverage: Available for 4 or more family residential building up to $250,000 per insured.
Contents Limit for Business Property: $500,000 limit for building owner contents and separate $500,000 limit for each tenant.
Coverage Limits are Indexed: Retroactive for some limits from September 30, 1994 until the date of enactment of the law.
Optional Extra Expense and Business Interruption Coverage: Rate must be self-sustaining for this additional $5000 of coverage as NFIP cannot borrow from the Treasury to sustain it.
Quarterly Installment Premium Option: Available for residential property subject to limitations prescribed by FEMA to limit moral hazard.
NFIP Basic Information:
Write Your Own Program (WYO)- program where private insurers write and service flood insurance program for a fee and NFIP insures. About 85% of NFIP policies are written this way. FEMA estimates that about 30% of premium is for underwriting and claim expense, split mostly for agent commission and general administrative expenses, but increasingly for claim adjustment expense. About 98% of the 30% is attributable to WYO policies.
NFIP Debt: FEMA is about $18 billion in debt to the US Treasury principally from 2004/5 (Katrina; Rita) and can borrow an additional $3 billion. About $800 million in interest is annually due the Treasury.
Subsidized Rates: Estimated that about $1.5 billion in premium is lost because of grandfathering of subsidized properties (i.e., those built before flood maps). Total flood premium collected is $3 billion. About 22% of 5.6 million policies are for subsidized properties. Severe Repetitive Loss (SRL) program mitigates some of this premium loss for properties sustaining multiple flood losses.
Mandatory Purchase: Estimated that only about 50% of properties subject to mandatory purchase (i.e., within 100 year flood plain, and federally regulated mortgages) actually do.
Residual Risk Areas: RRA are properties outside the 100 year flood plain or that are protected by flood control structures (i.e., near dam/levee or downstream of it). RRA are not required to purchase flood insurance. Estimated that 30% of NFIP are RRAs and account for 20% of NFIP losses. Current mapping may not account for structural issues with flood control. Remapping will continue.
Rating: FEMA rates are based upon estimated aggregate claims in an average historical year, rather than actuarially determined rates factoring in catastrophes.