By Diana BanksThe American Bankers Association is alerting bankers to a potential disruption related to flood insurance due to FEMA’s “Risk Rating 2.0” program. This program is a new pricing methodology which leverages industry best practices and cutting-edge technology, enabling FEMA to “deliver rates that are actuarially sound, equitable, easier to understand and better reflect a property’s flood risk.” While rate increases continue to be capped at 18% per year for most properties, having properties re-rated will still represent a significant increase in flood insurance premiums for many borrowers.
Moreover, Risk Rating 2.0 is likely to affect borrowers who have not previously seen large increases in their flood insurance premiums. Borrowers may also be informed as to what their full premium rate will be after future yearly increases are included. These full premium rates may be substantial in some cases.
Banks and other lenders should be prepared for questions regarding these changes in flood insurance and understand where to direct borrowers with questions regarding their coverage. Frontline retail staff as well as customer service representatives should be apprised of this information to facilitate a smooth transition during FEMA’s changes this spring. Further, banks may consider blanket communications to all borrowers in special flood hazard areas regarding these changes.
ABA expects that “Write Your Own” insurance carriers, which administer the majority of FEMA flood insurance policies, will begin communicating these changes to borrowers for insurance policy renewals scheduled for April 1, 2022, or later. Because policy changes are typically communicated in advance, we expect to see communications begin as early as February.
What bankers can share
Given these expected communications from insurers, ABA is advising bankers to be aware that questions regarding flood insurance policies should be directed to the borrower’s insurance agent as listed on the flood policy. Borrowers can also be directed to contact their homeowner’s insurance policy agent, as it may be the same agent as 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 carrier that provides private flood insurance policies.
Escrow and servicing issues
Furthermore, bankers and mortgage servicers should be aware of the following escrow and servicing issues related to flood insurance in light of Risk Rating 2.0:
First, for flood policy renewals, FEMA or the WYO carrier will send new bills for the flood insurance premium, which may cause escrow increases or decreases. Borrowers may have questions about these changes. Again, questions specific to the policy premiums or coverage should be directed to the flood insurance carrier and or agent for the policy.
Second, as Risk Rating 2.0 is rolled out, FEMA is allowing insurance agents to use provisional ratings for renewal policies. This may cause after-the-fact adjustments by lenders and mortgage servicers, as the provisional rating may return a premium-due amount that is either higher or lower than the actual policy premium.
This is similar to an existing issue of policy reformation that occurs after a flood insurance application is submitted. If the insurance agent makes an error in the policy that results in more premium due, the NFIP will issue a letter with a new bill that indicates if the additional premium is not paid, the policy benefit will be reduced to match the premium received. FEMA anticipates that agents may use provisional ratings if the agent does not have all the necessary information to properly rate the policy under the new Risk Rating 2.0 program. Should a provisional rating occur, and any additional premium due is not paid on a timely basis, the lender or servicer should begin the lender-placed insurance process for the difference between the policy benefit and the federally required amount.
As always, ABA stands ready to assist our bankers with any questions they may have concerning flood compliance or any other compliance issue. Please contact us at 1-800-BANKERS or firstname.lastname@example.org.
Diana Banks is VP and senior counsel for regulatory compliance and policy at ABA.