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Flood insurance, if it is not supplied or underwritten by the NFIP as part of the Federal Emergency Management Agency, is sold through surplus lines. Mississippi Insurance Commissioner Mike Chaney remarked in a chat in late August during the NAIC meeting in San Diego that Coastal American's underwriting discipline on flood insurance could have the social policy benefit of discouraging building poorly in risky areas.
Tiny Coastal American Insurance Co. embarked on a novel way to deliver company-underwritten flood insurance at a time when the financially struggling National Flood Insurance Program is still underwriting most flood insurance.
In an interview on the 11th anniversary of Hurricane Katrina, Aug. 29, and a follow-up a few weeks later, Coastal American co-founder and President Ned Dolese described a business plan he thinks makes sense for the risk it covers, a plan he hopes the Mississippi company can expand to other states.
Flood insurance, if it is not supplied or underwritten by the NFIP as part of the Federal Emergency Management Agency, is sold through surplus lines. But Coastal American is offering flood insurance as an endorsement to a standard homeowners policy, and is offering it outside of the government's mapped flood zone.
"To my knowledge, this is the first use of a flood endorsement to be written in America on admitted paper," Dolese said. The company wrote its first flood endorsement attached to a homeowners policy Aug. 2 in Mississippi. Admitted paper refers to the insurance carrier's approval from the state insurance department to write insurance in that state, with all of the accompanying compliance requirements.
Coastal American was approved for flood coverage this summer in Mississippi as well as in Alabama, where it anticipates kicking off flood coverage underwriting before the end of the year. In addition, the company is actively looking at states with coastal or water frontage. Dolese is scheduled to meet with South Carolina Insurance Commissioner Ray Farmer on Sept. 27 to discuss getting a license to sell its policies there.
The company is looking to expand in any state where the geography and economics make sense, Dolese said. He is looking at areas with middle-market homes set back from the water's edge in states such as Texas, Maryland, Virginia and Louisiana.
Dolese said the sweet spot for Coastal American coverage is with standard homes that are three or four blocks from the water, not the multimillion-dollar homes that line the sea or homes in rural areas without sufficient building codes. The properties he prefers to underwrite are well-built homes valued at $150,000 to $450,000. Dolese said the company seeks houses where it can deliver a flood endorsement at an affordable price.
"Middle America cannot afford to live on the water's edge," Dolese said.
Coastal American cannot compete with the subsidized NFIP rate anyway, for properties grandfathered in at a lower premium rate, nor does it want to, because the cost of rebuilding would outstrip the NFIP-based premiums, he said.
The government's maximum payout for a claim on a residential property is $250,000, which is nowhere near the replacement cost for an expensive property on the coast, Dolese noted.
He has answered critics who assume his company would have taken a beating in August had it been writing flood coverage in the Baton Rouge area, where homes nowhere near the coastline flooded after heavy rainfall. Coastal American would have held up really well, Dolese said, because it would have demanded higher premiums than "the State Farms and the Allstates" with their bundled policies. Instead of a $900 premium offered by others, Coastal might have charged $1,500, he said.
The company has even underwritten two policies on properties in the highest flood risk zone, the V-Zone, as mapped by FEMA. The two properties were not grandfathered in to the NFIP's lower rates, Dolese noted.
The higher premium price is more realistic given the risk, according to Dolese, whose company wrote its first homeowners insurance policy in 2010.
Mississippi Insurance Commissioner Mike Chaney remarked in a chat in late August during the NAIC meeting in San Diego that Coastal American's underwriting discipline on flood insurance could have the social policy benefit of discouraging building poorly in risky areas.
As of about Sept. 15, the company had written fewer than 200 flood endorsements with policies in just six weeks of offering them, Dolese said, about half of those in an X Zone, areas that are at moderate to low risk of flooding outside the 500-year floodplain. The other half are in the A Zone, which is still a special flood hazard area but not as high as a V-Zone area, Dolese explained.
"The take-up rate on people in an X Zone has been remarkable, and it is driven by price," Dolese said. Coastal American is now selling more policies with the flood endorsement than without, he added.
The company has reinsurance programs with Lloyd's of London as well as Bermuda reinsurers, Dolese said. "We want to make sure when there is a hurricane that we can pay these claims."
Copyright SNL Financial LC Sep 22, 2016