NFIP Plans to Strengthen Its Portfolio Protection Program

Flooding is the most common natural hazard in the U.S., yet the number of policies covered by the National Flood Insurance Program only grows by about 1% a year, according the Federal Emergency Management Agency.

That means for the roughly 500,000 new policies the NFIP brings in each year, about the same number are lost, which has the NFIP asking why so many flood insurance policies are not being renewed. FEMA hopes to improve that record and achieve a 5% annual growth rate in part by strengthening a program that competes with the private sector's force-placed insurance market.

FEMA policy analyst David Thomas told MSN recently that the agency is more concerned about making sure properties in flood hazard areas are insured than it is about who insures the properties. However, he said that FEMA does not currently have a way to track coverage flood coverage from private companies.

"The bottom line is that we are simply trying to improve our net growth rate and we are trying to make sure at-risk properties are protected," Mr. Thomas said.

Reducing attrition from the NFIP program is one way to make sure properties in areas subject to flood risk are covered, he said. He added that FEMA is not saying that the NFIP's coverage is any better or worse than private coverage offered through force-placed policies that lenders often use.

Mr. Thomas said mortgage lenders and servicers can play a role in helping ensure that coverage is widespread. He urged lenders to continue working to make sure that flood hazard determinations are accurate.

There are legitimate reasons for a payoff, the NFIP concedes. Mapping changes, paid-off mortgages, and properties selling for cash mean that there is no requirement for insurance to be required.

But the NFIP believes it can achieve its growth targets by reducing the rate of attrition in the NFIP program, and that will entail making the NFIP's own equivalent of forced-placed coverage more attractive to major mortgage servicers.

Mr. Thomas said in an article in FEMA's flood insurance newsletter that the NFIP's own mortgage portfolio protection program is designed to "encourage policyholders to purchase the standard flood insurance coverage through their agent rather than through lender-placed coverage, which can be much more expensive due to lack of underwriting data, and may be limited."

Mr. Thomas said that forced placement of private-carrier flood insurance on non-compliant properties by mortgage servicers may be reducing the number of properties covered by the NFIP. The NFIP "conservatively estimates" that 100,000 to 200,000 properties are insured by private, non-NFIP lender-placed policies.

The NFIP believes that by enhancing its Mortgage Portfolio Protection Program (MP3), it can encourage lenders to use this mechanism to keep coverage in place of homeowners who fail to renew their policies instead of private lender-placed services.

Currently, a gap in coverage occurs if a policy is not renewed and the MP3 is used to force-place coverage. That gap may discourage mortgage lenders from using the NFIP's MP3 to maintain coverage if the homeowner fails to renew a policy voluntarily.

The Federal Emergency Management Agency plans to extend its grace period for maintaining coverage when a lapse occurs. FEMA hopes this reform will make the MP3 more attractive as a tool for making sure that insurance is in place. On March 1, 2003, the FEMA became part of the Department of Homeland Security. FEMA's mission within the new department is to lead the effort to prepare the nation for all hazards.

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