What if you could buy flood coverage from a private insurance company, pay less money and get the same or better benefits as a policy sold through the National Flood Insurance Program?

You might. That's what Louis G. Fey Jr. did. Fey is vice president of risk management for Wright & Percy Insurance in Baton Rouge. He's one of a small but growing number of homeowners in less flood-prone areas who have made the move to private flood coverage.

But the obvious allure of private flood insurance, which isn't available to people living in high-risk zones, underscores what experts say could be a much larger downside. Private insurers cherry-picking properties in the least risky areas eventually could doom the already underfunded, government-sponsored National Flood Insurance Program, Fey and others said. 

 

"It gives me the same limits of coverage for about $200 less a year," Fey said of his private policy, "but I also get additional living expenses and replacement cost coverage, which I can't get through the National Flood Insurance Program."

Under NFIP, a homeowner can purchase up to $250,000 in coverage for structural damage and $100,000 for contents. But contents coverage is limited to "actual cash value," or the replacement cost minus depreciation. That means the gap between what the policy will pay for a 5-year-old sofa and the cost for a new one can be considerable.

Fey's private flood policy includes replacement cost, the actual amount he would need to buy a new sofa or a television. In addition, and unlike NFIP policies, his new policy includes additional living expenses, money that covers costs such as a hotel room if flooding renders his house uninhabitable.

"What's happening is these private insurers are gobbling up all these prime properties that are not in flood-prone areas," Fey said. "And they're able to do that and reduce premium and give better coverage for those risks because (those properties) probably are not going to flood."

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If the same people buy coverage through NFIP, they pay more because they're helping subsidize premiums for more flood-prone homes, Fey said. By cost shifting, NFIP makes coverage more affordable for high-risk properties.

Fey bought his policy from Western World, a surplus lines company, whose officials were not available for comment over the past two weeks.

Surplus lines companies rates are regulated in the state where their headquarters are located. To do business in Louisiana, they must register and meet eligibility and financial requirements, such as $15 million in capital and surplus, although the insurance commissioner can approve totals as low as $4.5 million. If the companies fail, their claims won't be paid by the state's guaranty fund. Surplus lines companies have been selling flood insurance for years, but those typically are supplemental policies that cover any damage above the NFIP limits or provide additional benefits.

In Louisiana, surplus lines companies don't sell much in the way of flood insurance.

The 20 largest surplus lines brokers in Louisiana had just $1.1 million in annual premiums for the same kind of coverage offered by NFIP, state Insurance Commissioner Jim Donelon said. The Insurance Department does not know how many properties are covered, but Donelon believes lower premiums drove the purchases.

The most recent figures show NFIP covers 480,000 residential and commercial properties in Louisiana, representing $355 million in annual premiums.

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Neither Donelon nor the National Association of Surplus Lines Offices expect surplus lines companies will take away make much of the flood business from NFIP — for now. That's because the main driver for flood insurance is lenders requiring homebuyers in high-risk zones to carry the coverage, and that the coverage is from NFIP, Donelon said.

Brady Kelley, executive director of the National Association of Surplus Lines Offices, said surplus lines companies excel at underwriting very specific risks, but those risks tend to be more complex. This more granular approach, while effective, tends to limit the volume of properties surplus lines companies insure against flooding.

Kelley expects the real competition for NFIP will come from standard carriers, companies like Chubb and AIG, which are state-regulated.

Standard carriers have steered clear of offering their own flood policies for half a century. The NFIP was established in 1968 because property owners couldn't buy flood insurance on the private market. 

But Congress opened the door to private flood insurance in the 2012 bill reauthorizing the NFIP. So far only a few standard carriers have stepped in, but could find that door opening wider when Congress renews the program, which expires Sept. 30.

At present, several dozen standard companies, which represent a very large share of the private insurance market, write and service NFIP policies, Kelley said. But under federal law, the companies that sell NFIP policies can't offer their own competing products.

Private flood coverage also has been limited by the 2012 bill's wording, which led to some uncertainty about whether private flood policies meet mortgage lenders' requirements, Kelley said. The U.S. House of Representatives attempted to clarify the law in 2016 but the rewrite didn't make it out of the Senate.

Donelon said he expects Congress will tackle the issue again.

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There's a much greater push from reinsurers and standard companies anxious to get into the private flood insurance market, Donelon said. Reinsurers, which insure insurance companies, are flush with cash from investors and looking for other opportunities to profit. For the moment, their focus is on private flood policies.

"Insurers always feel they can price that risk. That's what they do. That's their profession," Donelon said.

The appetite for the private flood business varies from state to state, although the trend is so new that national figures aren't yet available. The National Association of Insurance Commissioners began gathering data in 2016 and expects to issue a report around March.

The move to basic private flood coverage began just a couple of years ago, said Aaron Brandenburg, statistical information manager for the NAIC.

"There wasn't much written. Even now most of it's written on a surplus-lines basis," Brandenberg said.

A number of "Lloyds companies" — insurance syndicates where members assume part of every risk — have been active in the South's private flood market.

Don Griffin, vice president of personal lines for the Property Casualty Insurers Association of America, said Florida has the most progressive stance on private flood coverage.

Three years ago, the state passed a law to make it easier for insurers to move into the business, Griffin said. Still, there are probably fewer than 10,000 private flood policies in Florida, which has about 1.8 million NFIP policies.

In Louisiana, none of the standard companies offer basic flood coverage for homeowners, Donelon said, and only a few surplus lines companies do.

It's different in Pennsylvania, where the state Insurance Department set up a flood insurance web page that includes contact information for 17 standard companies and 40 surplus lines brokers. The department launched the page in February to help consumers find cheaper alternatives to NFIP, spokesman Ron Ruman said.

When the Federal Emergency Management Agency, which oversees NFIP, redrew flood maps, many homeowners found themselves in high-risk flood zones for the first time. Flood insurance rates soared. 

By encouraging private flood coverage, Pennsylvania has saved some serious cash for consumers whose homes may have been redrawn into flood plains, or whose property is only partially in a flood plain. One homeowner who was paying $2,000 for an NFIP policy found private coverage for $400, according to the department. Another cut flood insurance premiums by $2,000 a year.

Pennsylvania Insurance Commissioner Teresa Miller has warned the private market probably won't insure homes in the highest-risk areas.

But Griffin, with the Property Casualty Insurers Association of America, expects insurers to take on higher-risk properties.

"It will happen. It will happen. If they think they can make money, they will underwrite the risk," he said.

Follow Ted Griggs on Twitter, @tedgriggsbr.