• U.S. Senate Subcommittee Hears Testimony on Bigger-Waters Flood Reform from FEMA's Craig Fugate, Consumer and Government Representatives
  • September 23, 2013
  • Law Firm: Colodny Fass Talenfeld Karlinsky Abate Webb P.A. - Fort Lauderdale Office
  • Federal Emergency Management Agency ("FEMA") Administrator Craig Fugate, and Louisiana Senators David Vitter and Mary Landrieu were among those testifying today, September 18, 2013, before the U.S. Senate Committee on Banking, Housing and Urban Affairs' Subcommittee on Economic Policy at a hearing entitled "Implementation of The Biggert-Waters Flood Insurance Act of 2012:  One Year After Enactment."

    Also testifying on behalf of various consumer organizations was Birny Birnbaum, who delved deeply into the subject of force-placed flood insurance coverage, which he predicted will "explode" with the implementation of the Biggert-Waters Flood Insurance Reform Act of 2012.

    In his remarks, Birnbaum noted that Florida offers a unique microcosm that reveals troubling questions about force-placed insurer loss ratios.  He also recommended the prohibition of force-placed captive reinsurance arrangements, which he decried as "profit sharing mechanisms."

    In his testimony, Mr. Fugate explained that approximately 20 percent of policyholders (representing approximately 1.1 million of the 5.6 million National Flood Insurance Program policies) currently pay subsidized rates.  As FEMA implements the changes stipulated in the Biggert-Waters Flood Insurance Reform Act of 2012, these policyholders will eventually pay rates that reflect actual risk to their properties, he said.  The remaining 80 percent of policyholders will not see increases as a result of this change, although it is possible that their rates will increase if, in the future, new maps reveal higher risk under the phase-out of grandfathered rates required by the legislation.

    Various bills have been introduced to curtail the anticipated rate increases, particularly by Louisiana Senators David Vitter (R) and Mary Landrieu (D).

    Mr. Fugate related that FEMA has initiated 600 Risk Mapping, Assessment and Planning ("Risk MAP") projects affecting 3,800 communities with high-priority engineering data needs, including coastal and levee areas.

    Insofar as levees, he said, FEMA has reviewed its approach to mapping flood hazards with respect to non-accredited levees.  Although some levee systems do not fully meet the requirements for accreditation, they may still provide some measure of flood risk reduction.

    As a result, FEMA is introducing a new approach of targeted modeling procedures to replace the previous "without levee" approach that did not recognize a non-accredited levee as providing any level of protection to communities behind the levees during the base (1-percent-annual-chance) flood, Mr. Fugate explained.  These procedures are expected to better characterize actual conditions that a community may encounter when addressing non-accredited levees or levee systems.

    He added that FEMA will use these new procedures to produce Flood Insurance Rate Maps ("FIRMs"), Flood Insurance Study reports and related products for communities, as well as tribes impacted by non-accredited levee systems.

    A core goal of the new procedures includes more precise identification of the flood hazard associated with levee systems and reflecting the results in the mapping, he said.  An important outcome of the effort is also increasing the credibility of FIRMs where non-accredited levee systems exist.

    The new approach, accompanied by operating guidance, will be applied to a limited number of projects during fiscal year 2013, and other future mapping projects will be prioritized as additional funding is available.

    To accomplish this, Mr. Fugate advised that FEMA Regional Offices contact targeted communities to identify participants for a discussion about their local levee system and facilitate a "Local Levee Partnership Team" as needed.

    Also testifying today was Birny Birnbaum, Executive Director of the Center for Economic Justice, who discussed force-placed flood insurance ("FPI") on behalf of his own organization, as well as the Consumer Federation of America, United Policyholders, the Center for Insurance Research, the National Fair Housing Alliance and the National Consumer Law Center's low-income clients.

    Mr. Birnbaum explained that FPI insurers annually report their experience to state insurance regulators in the Credit Insurance Experience Exhibit ("CIEE") supplement to Statutory Annual Financial Statements.  The data, however, is not broken out separately for FPI flood versus FPI hazard.

    But while the data reflects the experience of the largest writers in the market, he estimated that some 90 to 95 percent of FPI insurers fail to submit required CIEE reports.  Of the data submitted, there have been huge increases in gross written premium, net written premium and earned premium from 2004 through 2011, followed by continued high premium levels in 2012.  The data also show that the ratio of claims paid to premiums collected by FPI insurers has been very low--averaging about 25 percent, he said.

    In his testimony, Mr. Birnbaum provided a table demonstrating that, in Florida--described as the "state with the greatest catastrophe risk and the largest amount of FPI premium"--FPI loss ratios were far less than homeowners loss ratios during years in which catastrophe events both did and didn't occur.  Another table showed homeowners and FPI loss ratios for all states except Florida, again demonstrating that FPI loss ratios are far below those of homeowners loss ratios.

    Of particular note, he said, are the years 2011 and 2012.  While the homeowners insurance loss ratio jumped in 2011 because of major catastrophe events, the FPI loss ratio remained low.  When "Superstorm Sandy" struck in 2012, despite flood loss being covered by FPI, but not by homeowners insurance, the FPI loss ratio remained far below the homeowners loss ratio.

    Touching on captive reinsurance arrangements, Mr. Birnbaum defined them as those in which an FPI insurer reinsures a portion of FPI business with a reinsurance company owned or affiliated with the servicer.  Calling them " . . . profit sharing mechanisms designed to provide additional considerations to the servicer," he said these arrangements serve no substantive risk management purpose and, consequently, serve no purpose for FPI consumers or borrowers.

    The arrangements should be prohibited, Mr. Birnbaum continued, because they create a conflict of interest between the servicer and the borrower.  By having a financial interest in the price and placement of FPI through a captive reinsurance program, the servicer has a glaring conflict with the interest of the borrower for lower-cost FPI.  Those in the industry cannot eliminate their conflict of interest by simply testifying that one does not exist, he added.

    Regardless of whether captive reinsurance arrangements are ultimately prohibited, Mr. Birnbaum recommended that the "likely substantial" expenses associated with administering the arrangements should be excluded from FPI rates because these expenses provide no benefit for the borrower. 

    FPI placement will "explode" as the Bigger-Waters Act is implemented, he predicted.  As National Flood Insurance Program ("NFIP") premiums become unaffordable and borrowers are unable to maintain NFIP coverage, servicers will force-place it, offering no solution for borrowers since flood rates are also very high.  As lenders and servicers face greater penalties from the Biggert-Waters Act for failing to ensure required flood insurance is in place, he said, servicers will be likely err on the side of too many placements.

    Mr. Birnbaum expressed his opinion that the Federal Housing Finance Agency is now in a "singular" position to address problems with FPI flood coverage by:

    1.   Allowing Fannie Mae and Freddie Mac to implement the direct purchase FPI and the insurance tracking program that had been heretofore readied for use this year;

    2.   Addressing excessive retroactive billing by refusing to reimburse a servicer (or insurance tracking vendor) for any retroactive FPI charges for more than 60 days of coverage and for any period of time after 60 days from the lapse in coverage; and

    3.   Requiring servicers to advance payment for voluntary insurance policies that are at risk of cancellation for non-payment of premium instead of placing FPI, regardless of whether the borrower has an existing escrow account.