Don’t let your bank fall into the hazards of Flood Compliance 2.0
Updated October 25, 2022
On April 1st, 2022, FEMA implemented Phase II of their new rating system, Risk Rating 2.0. The National Flood Insurance Program’s pricing methodology had been the same since the 1970s and was in major need of an update. This pricing method update is an attempt to ensure fiscal soundness of the National Flood Insurance Program (NFIP) in the years to come.
Unfortunately, the implementation of Risk Rating 2.0 has resulted in many policyholders seeing a significant increase in their premiums. Consequently, borrowers have questions and lenders have received a flood of inbound calls from borrowers seeking answers.
On top of trying to calm frustrated customers, loan servicing teams must also avoid the Risk Rating 2.0 compliance hazard: provisional rating.
We'll offer insights to help loan servicing teams confidently address borrower questions as well as provide information on what banks should do to deal with the potential risks of provisional rating policies.
Borrower Questions 2.0
Many borrowers have been blindsided by a substantial increase in their flood insurance premium- and they often take that out on the loan servicing department. It's easy to understand why as they are frustrated and full of questions. Some may have turned to their insurance agent for answers, but many have turned to their lenders.
Here are 3 flood insurance questions borrowers may have and how to answer them:
Question #1: Why has my insurance premium increased?
Unfortunately, lenders are not in a position to give answers as to why a borrower’s premium has been adjusted. All questions regarding policy specifics should be referred to the borrower’s insurance agent. Lenders may, however, inform borrowers that flood insurance policies issued by the NFIP are subject to a new pricing methodology.
Question #2: Why has the pricing method changed?
Upon learning that NFIP policies are subject to a new rating method, borrowers may want to know why the change was implemented. Lenders should give borrowers a brief overview in terms the borrower will understand. Let them know that the previous method of determining premiums had not been updated since the 1970s and that rates were no longer reflecting the risks.
Question #3: What can I do about it?
Lenders should inform borrowers that they have the right to shop for and purchase flood insurance through a private insurer. Lenders may choose to form a list of private insurance providers available in their jurisdiction. Some states may have a list of providers on their department of insurance website. If not, a quick call to the State Commissioner’s office will provide the same information.
While lenders are not in a position to discuss policy specifics or reasons for premium adjustments, they are able to point borrowers in the right direction to get their questions answered and remind them of their flood insurance options.
This is why policy and education are key. Loan servicing managers should establish a policy on how to address flood insurance questions and discuss said policy with their staff. This policy should be in conjunction with a tracking system that reduces borrower noise significantly.
The Problem with Provisional Rating
To minimize the risk of non-renewals of NFIP policies, FEMA is allowing insurers to use provisional ratings for any renewal policies with an expiration date of April 1, 2022, through March 31, 2023. An insurer must be careful to follow provisional rating guidelines outlined in the October 2021 NFIP: Flood Insurance Manual.
If an agent makes an error in the policy, there are likely to be after-the-fact premium adjustments once the policy is endorsed. Unfortunately, these premium adjustments do not always result in a refund to the borrower.
If a provisional rating error results in more premium due, the NFIP will issue a new bill along with a letter to the policyholder, agent, and lender advising that the policy benefit will be reduced to match the premium received if the additional premium due is not paid in a timely manner.
A reduction in the policy benefit amount causes a major problem for lenders. NFIP guidelines state that coverage amounts must be the lesser of the following:
- insurable value,
- outstanding loan balance,
- or the NFIP maximum policy benefit ($250,000 for residential property; $500,000 for commercial property).
If the borrower does not pay the additional premium due in a timely manner, the policy benefit will decrease. This may lead to coverage being considered insufficient under regulatory requirements, and the lender will need to begin the process of force-placing insurance.
Monitoring the insurable value associated with a flood insurance policy is vital to determine if a reduction in coverage triggers the need for force-placed insurance. Modern insurance tracking systems use sophisticated technology to automate the monitoring process and are necessary to keep lenders safe from regulatory scrutiny.
Let Miniter Help
Due to Risk Rating 2.0, loan servicing teams are likely to face many flood insurance renewal policies that will not provide sufficient coverage to remain compliant with regulatory standards. This means that the need for force-placed insurance will increase. And, it may lead to
- amplified borrower noise,
- internal staff costs,
- and a strain on borrower relationships.
At Miniter, we have a proven method for limiting the need for force-placed insurance. Using our Borrower Centric℠ approach to insurance tracking, we provide our lenders protection from compliance failures and help maintain borrower satisfaction.