On 6 July 2012 President Obama signed a bill which provided for a five year extension of the US National Flood Insurance Program. The extension was enacted as part of the Surface Transportation Extension Act of 2012 (the “Act”). Title II of the Act, which relates to the NFIP, extends the program through to 31 July 2017, as well as introducing a number of reform measures. The underlying objective is to transfer flood risk away from tax payer funded programs into the private risk transfer markets.  The Act also looks to end subsidies and bring rates up to actuarially-supported levels. 

Important Reforms for Lloyd’s

The provisions of the Act most relevant to Lloyd’s relate to requirements regarding private flood insurance and writing reinsurance cover for NFIP.

  • NFIP Reinsurance – The Act includes a provision authorising NFIP to purchase private market flood reinsurance rather than relying on borrowings from the US Treasury Department. In particular, NFIP will be permitted to purchase private market flood reinsurance from: (i) authorised insurers[1], (ii) reinsurers subject to the 1934 Securities Exchange Act, and (iii) reinsurers authorised by the Federal Emergency Management Agency (‘FEMA’). Lloyd’s intends to pursue authorisation by FEMA so that the market will be eligible to write this coverage.
  • Private Flood Insurance – The Act requires that mortgage lenders must accept non-NFIP private flood cover as long as it is comparable to NFIP-backed cover. Previously, many lenders required NFIP coverage and would not accept private flood coverage. Surplus lines insurers, such as Lloyd’s, are now clearly eligible to provide private flood insurance for commercial properties. Only insurers that are “licensed, admitted or otherwise approved to engage in the business of insurance” in the state where the property is located can provide private flood coverage for residential properties. The use of the phrase “otherwise approved to engage in the business of insurance” is somewhat ambiguous as to whether this includes surplus lines insurers. Lloyd’s is taking steps to seek legislative clarification that surplus lines insurers are permitted to provide private flood coverage for residential properties, in addition to commercial properties.

Summary of Reforms

Some of the other key reforms include:

  • Ending Subsidies – The Act provides for an end to subsidies for commercial properties and severe repetitive loss properties, along with a prohibition on subsidies for new or lapsed insurance policies.
  • Rate Reforms – The Act includes a requirement that FEMA incorporate historical flood loss obligations into its calculations to determine how to set its actuarial premiums. It also provides for an increase to the annual cap on premium rate increases from 10% to 20%. Minimum deductibles will also be required.
  • Reports – FEMA is required to draft a number of reports including reports regarding options for eliminating NFIP’s outstanding debt and a repayment schedule for retiring that debt and an annual report on new flood mapping standards.

Lloyd’s will communicate further with the market once Lloyd’s has been approved by FEMA as an approved reinsurer for the NFIP. In the interim, should you have any further questions about the NFIP reforms, please contact:

Giles Taylor
Manager, International Regulatory Affairs

Jacqueline Sinclair
Executive, International Regulatory Affairs


[1] The specific language in the bill refers to any “person that is authorized to engage in the business of insurance under the laws of any State”.