By Diana Banks
JThe American Bankers Association is alerting bankers to potential disruption related to flood insurance due to FEMA’s “Risk Rating 2.0” program. This program is a new ratemaking methodology that leverages industry best practices and state-of-the-art technology, enabling FEMA to “provide rates that are actuarially sound, fair, easier to understand, and better reflect the risk of flooding a property”. Although rate increases will continue to be capped at 18% per year for most properties, reappraisal of properties will still represent a significant increase in flood insurance premiums for many borrowers.
Additionally, the 2.0 risk rating is likely to affect borrowers who have not previously experienced significant increases in their flood insurance premiums. Borrowers can also be notified of what their full premium rate will be after future annual increases are included. These full premium rates can be substantial in some cases.
Banks and other lenders should be prepared to answer questions about these flood insurance changes and know where to direct borrowers with questions about their coverage. Front-line retail personnel as well as customer service representatives should be made aware of this information to facilitate a smooth transition during FEMA’s changes this spring. Additionally, banks may consider general communications to all borrowers in flood risk areas regarding these changes.
The ABA expects “Write Your Own” insurance companies, which administer the majority of FEMA’s flood insurance policies, to begin communicating these changes to borrowers for policy renewals. insurance scheduled for April 1, 2022 or later. Since policy changes are usually communicated in advance, we expect communications to begin as early as February.
What bankers can share
In view of these expected communications from insurers, the ABA advises bankers to be aware that questions regarding flood insurance policies should be directed to the borrower’s insurance agent as indicated on flood policing. Borrowers may also be advised to contact their home insurance agent, as this may be the same agent as the flood insurance.
If borrowers need help finding a flood insurance provider, they can be directed to FEMA resources at FloodSmart.gov/flood-insurance-provider or call the NFIP at 877-336-2627. In addition, private market flood insurance, which is not administered by the NFIP, is also widely available. Borrowers can search online or contact the state insurance commissioner in the jurisdiction where the property is located for an insurance company that provides private flood insurance policies.
Escrow and Service Issues
In addition, bankers and mortgage managers should be aware of the following escrow and service issues related to flood insurance in light of the 2.0 risk rating:
First, for flood policy renewals, FEMA or the carrier WYO will issue new invoices for the flood insurance premium, which may result in increases or decreases in escrow. Borrowers may have questions about these changes. Again, questions specific to premiums or policy coverage should be directed to the flood insurance company and/or the police officer.
Second, as Risk Rating 2.0 is rolled out, FEMA is allowing insurance agents to use provisional notes for renewal policies. This can lead to after-the-fact adjustments by lenders and mortgage managers, as the provisional rating may return a premium amount due that is higher or lower than the actual policy premium.
This is similar to an existing policy reform issue that arises after a flood insurance claim has been submitted. If the insurance agent makes an error in the policy that results in an increase in the premium due, the NFIP will issue a letter with a new invoice stating that if the additional premium is not paid, the policy benefit will be reduced to match the premium received. FEMA provides that officers can use provisional ratings if they do not have all the information needed to properly rate the police under the new Risk Rating 2.0 program. If a provisional appraisal occurs and any additional premium due is not paid in a timely manner, the lender or servicer must begin the process of lender-placed insurance for the difference between the provision of the policy and the amount required by the federal government.
As always, the ABA is ready to help our bankers with any questions they may have regarding flood compliance or any other compliance issues. Please contact us at 1-800-BANKERS or [email protected]
Diana Banks is Vice President and Senior Counsel for Regulatory Compliance and Policy at ABA.