| The National Flood Insurance Program (NFIP) is making some changes to Preferred Risk Policy (PRP) eligibility to benefit owners of buildings newly mapped into Special Flood Hazard Areas (SFHAs).
Why Is the NFIP Making Changes to PRP Eligibility?
The assessment of flood risk can change over time due to community development, aging flood control structures, natural changes in topography, and scientific advances. In 2003, more than 70 percent of the flood hazard maps were at least 10 years old and no longer accurately reflected then-current flood risk assessments. Congress took notice, funds were appropriated, and a mandate was issued to update the nation’s flood maps over a 5-year period. This effort, known as Flood Map Modernization – and now Risk MAP – uses the latest data and technology to provide communities with updated flood maps.
As a result, communities are gaining a better understanding of their real flood risk. In some cases, property owners will find the assessment of flood risk for their building has been reduced. Others will find the assessment of risk has been increased. The risk of flooding is real and many owners of buildings now being newly mapped into higher flood risk zones find that lenders are requiring them to purchase flood insurance.
FEMA recognized the financial hardship that is being placed on owners of buildings newly mapped into a Special Flood Hazard Area (SFHA). To help reduce the cost of insurance for these buildings, the eligibility period to purchase a low-cost Preferred Risk Policy (PRP) is being extended. Starting January 1, 2011, owners of buildings affected by map revisions will be eligible to purchase a PRP after the building is newly mapped into a high-risk area. This eligibility extension will extend for 2 years following January 1, 2011, or the map revision effective date, whichever is later. Eligibility will also be granted to all buildings that are newly mapped into an SFHA on or after October 1, 2008, beginning with the policy year effective on or after January 1, 2011.
The 2-year PRP Eligibility Extension is intended to give property owners adequate time to understand their flood risk, plan accordingly, and save to begin paying the full-risk premium after the extension period ends. At the end of the 2-year period, the PRP will be converted to a higher-cost standard-rated policy.
Does Grandfathering Apply?
In addition to this extension, FEMA has revised the NFIP grandfathering rules. For those who purchase the PRP during the eligibility extension, upon conversion to the higher-cost standard-rated policy, grandfathering may apply. Under the higher-cost standard-rated policy, grandfathering often provides a more permanent rating option, which may cost less than being rated in the high-risk flood zone. Grandfathering allows policyholders with standard-rated policies to continue to be rated using the zone applied at the time of the initial purchase of flood insurance, so long as continuous coverage is maintained and there is no substantial improvement to the building. While a standard Zone X–rated policy is more expensive than the PRP, it is often less expensive than standard rating using an SFHA zone.
Who Is Eligible for the PRP Extension?
Owners of buildings that were newly mapped into an SFHA due to a map revision on or after October 1, 2008, are eligible for a PRP for up to 2 policy years beginning on January 1, 2011. Policies that were previously issued or converted to standard-rated policies following a map change on or after October 1, 2008, may be converted to the PRP for 2 years beginning on the first renewal effective on or after January 1, 2011.
Buildings must also meet the PRP loss history requirements. If there are two claims or disaster relief payments for flood loss of $1,000 or more, or three loss payments of any amount, the structure is ineligible for the PRP.
Property owners who are now eligible for the PRP, but who are not NFIP policyholders, can and should take advantage of this cost-savings option. For example, agents will want to offer the PRP to those property owners eligible for the PRP extension who previously declined a flood insurance offer due to the price of the standard-rated policy calculated after a map revision into an SFHA. Likewise, those property owners who purchased standard-rated flood insurance due to a lender mandate after a map revision may also qualify for the PRP extension. Property owners are encouraged to contact an insurance agent to discuss eligibility and maximize their premium savings.
Policyholder Notification
Potentially eligible policyholders will be notified by their insurer of their potential PRP Extension Eligibility at least 90 days prior to policy expiration. The agent will be copied on that notice from the insurer. The notification should advise property owners and the agent of the appropriate procedures to validate eligibility, as well as the procedures and documentation required to convert the policy from standard to preferred rates.
Agents may want to review the Questions and Answers (Q&A) document attached to the bulletin referenced below in case they receive calls from their policyholders and potentially eligible property owners.
The Future of the PRP Extension
The 2-year PRP Eligibility Extension is a permanent change to the eligibility rules for the PRP effective January 1, 2011. What this means, for example, is that if maps are revised in 2015, property owners will be able to purchase the PRP within 24 months from the effective date of the new map.
The Map Modernization project has ended. However, Risk MAP (Mapping, Assessment, Planning) is FEMA’s current 5-year mapping initiative that builds on the successes of Flood Map Modernization. While Flood Map Modernization was focused on generating new countywide FIRMs, Risk MAP will be focusing more on a watershed level as well as remapping all coastal areas. The PRP Eligibility Extension will help to provide temporary financial relief for your customers in the coming years as FEMA’s map updates continue. For more information on Risk MAP, go to http://www.fema.gov/plan/prevent/fhm/rm_main.shtm .
Further Reading
For more information on the PRP Eligibility Extension, please see the NFIP Clearinghouse bulletin at http://www.nfipiservice.com/stakeholder/pdf/bulletin/w-10076.pdf. The bulletin incorporates several attachments. They include background and description of the NFIP and PRPs, an advanced technical Q&A that can answer many questions about rewriting the policy, the PRP section of the NFIP agent’s manual, and details for WYO Company information submission to the NFIP.
For more information about the PRP Eligibility Extension, please visit http://www.floodsmart.gov/floodsmart/pages/prp_extension_information.jsp?WT.mc_id=PRPExtension.
For more information about FEMA and the NFIP, please visit http://www.fema.gov/business/nfip/.
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eWatermark will offer more information on other related topics in upcoming articles.
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