In 2014, the Florida Legislature passed a one-of-a-kind law ushering the private flood insurance industry into the state for the first time ever.
S.B. 158 simplified the process for companies to set prices. Three years later, the Sunshine State is one of the only places in the nation where homeowners can get flood coverage from somewhere other than the National Flood Insurance Program. Twenty companies offer plans and count roughly 20,000 residents as customers.
Now, with Congress weighing whether or how to grow the private flood insurance market nationwide with the goal of reducing NFIP's mounting debt, Florida's burgeoning industry is receiving renewed attention. But analysts say what worked there is unlikely to repeat, forcing Congress to focus on other solutions.
Florida's story began in 2012, when Congress passed the Biggert-Waters Flood Insurance Reform Act to limit subsidized premiums for some federal policies. The law turned out to be a shock to the system.
NFIP offers lower rates for properties that predate the federal program but adhere to housing codes from their time of construction, regardless of the owner's financial status.
It also "grandfathers in" properties, allowing homeowners to keep their current premium rates even if new Federal Emergency Management Agency flood maps calculate their risk has increased.
Biggert-Waters required raising NFIP's most-subsidized premiums until they attained actuarially sound levels. Under the law, some 250,000 business owners, second-home owners and people with frequently flooded properties saw immediate 25 percent increases.
The law put another 578,000 policyholders on notice that they would only keep subsidies until they either sold their homes or suffered severe, repeated flood losses.
With 1.7 million NFIP policies, Florida accounts for 35 percent of the national program. Any change in federal policy would hit the Sunshine State the most.
Pinellas County state Sen. Jeff Brandes (R), whose district is home to the most subsidized policies of any county in the nation, started getting calls.
"People's premiums were increasing by thousands of dollars, they were saying they had to turn their keys into the bank," he said. "It devastated the real estate market in my community."
Brandes did some research and decided his constituents needed more options for flood insurance. He drafted a bill with help from Lisa Miller, a former state insurance commissioner-turned-lobbyist who helped Brandes draft the law.
Though Congress ultimately reversed the most extreme rate hikes in Biggert-Waters, Miller says the sticker shock was key to convincing Florida legislators to welcome the private market.
"When people have the choice of paying the higher NFIP rate or the lower private insurance company rate, what do you think they are going to choose?" she said. "The market drives the product."
'Shocked no one else has done this'
Today, Florida's private insurance market is young, but growing. Two more companies decided to cover flood risk this summer, and industry watchers say more are on the way.
Florida's law allows for four types of private flood plans, ranging from standard coverage mirroring NFIP to three advanced kinds of coverage.
Those policies offer things NFIP doesn't, like living expenses to temporarily move out of flood-damaged homes. Some private policies exceed NFIP's $250,000 coverage cap for residential properties, while others are bundled with homeowners' insurance.
While flooding has historically been seen as too risky for private companies, recent advances in computer modeling have helped them better predict risk and make insurance more affordable.
Christopher Heidrick, an insurance agent on Sanibel Island, Fla., said many companies can customize rates in ways NFIP can't.
NFIP rates are largely based on whether homes are located in the 100- or 500-year floodplain. But homes in the middle of a floodplain carry different risks than those closer to the edges, a nuance NFIP doesn't account for.
"There is a big difference between a property with a 0.3 percent chance of flooding and a 0.99 percent chance of flooding, but all of those are technically in NFIP's 100-year floodplain," said Heidrick, who chairs the flood insurance task force for the Independent Insurance Agents and Brokers of America Inc.
"That difference is something private companies calculate and translate into better rates for homeowners," he said during a recent interview.
Private policies can come with risks. In the two weeks after Hurricane Irma, Florida's Department of Financial Services received nine consumer complaints about private policies, compared to just one about NFIP.
And unlike NFIP, private companies don't always guarantee customers' policies will be renewed the next year. What's more, private flood insurance may not be available to everyone.
"We say no," said Kevin Mitchell, vice president at HCI Group Inc.
The group began offering flood insurance via a smartphone app last year and writes policies in all FEMA flood zones. But HCI limits the number of high-risk homes it insures in the same ZIP code.
"Once we make a promise to a number of homeowners in a given area, we think it is best for them and us that we don't oversaturate that area so we can financially respond in the event of a loss," Mitchell said.
Locke Burt, chairman and president of Security First Insurance, told Insurance Journal this summer that some properties insured by NFIP, like those that have suffered repetitive losses, "will never be insured by the private market."
Some lawmakers have expressed concerns that a large private insurance market could lead to "cherry-picking," leaving NFIP with only the most-risky, most-subsidized policies. Others note that NFIP could lose funding for mitigation if too many policies move to the private market.
That hasn't slowed privatization's supporters. Three years later, Brandes says his only regret is that more states haven't followed his lead.
"I'm really shocked that no one else has done this," he said. "People should be taking the model and running with it."
Faced with reforming and reauthorizing NFIP before the program expires in December, Congress is gun-shy about raising rates again. And White House proposals to limit subsidies for all but low-income policyholders have fallen on deaf ears.
This time around, lawmakers are hoping that regulatory clarity will nudge more private companies toward covering flood risk.
The proposal with the most traction comes from Florida Reps. Dennis Ross (R) and Kathy Castor (D). Proponents of the bill say it would fix a blunder made during the 2012 NFIP reauthorization.
Then, Congress reformed the program to allow homeowners in 100-year floodplains to carry private policies but said they had to be "substantially similar" to ones offered by the federal government.
Banking regulators, however, have been skittish about defining that term, and the private market has remained small as a result.
Ross and Castor want to clarify that private insurance fulfills federal requirements and would empower state insurance commissioners to decide when private policies are "substantially similar" until banking regulators come up with their own definition.
"We see this as basically a technical correction," says R.J. Lehmann, a senior fellow at the free-market-oriented think tank R Street Institute.
But the bill would also eliminate a provision requiring private policies to be "at least as broad" as NFIP, which consumer advocates fear could put homeowners at risk.
Robert Hunter, director of insurance at the Consumer Federation of America, said he doesn't understand why the bill has to eliminate that language.
"Why does it stifle [private companies] if all they have to do is be equal?" he said. "All it does is stifle them from screwing people."
Chad Berginnis, executive director of the Association of State Floodplain Managers, said Florida's experience shows the Ross-Castor bill isn't necessary.
"There is a huge mythology around this bill that if only we would pass it, private insurers would participate," he said. "But Florida shows us that Biggert-Waters already opened that door."
Berginnis said he believes Congress should give states and banking regulators more time to act before making more changes to federal law, especially given that Hurricane Irma is the first major storm to hit Florida since private insurers began writing flood policies there.
"I understand there is a big appetite right now at a time without any big disasters, but there is still a question of whether private industry can weather big events," he said.
Berginnis and Hunter are particularly concerned that the language will allow for more flood policies on what's called the excess and surplus lines market.
While common kinds of coverage — like homeowners or car insurance — are on the "admitted market" and must adhere to a number of state regulations, so-called surplus lines insurance is reserved for coverage where risk is less predictable.
Those policies are less regulated, and companies offering surplus lines are not required to guarantee funding a claim if they go bankrupt.
Miller, the Florida lobbyist, said she supports the Ross-Castor legislation but understands concerns about the surplus lines market.
Miller said she thinks Congress will still ultimately have to raise rates or cede a portion of the insurance market to private companies.
That's an idea House Republicans considered and then rejected this summer after facing resistance from the real estate and building industries (E&E Daily, Sept. 6).
"After laws pass, people continue to talk," Miller said. "We will eventually have to raise rates to get more players into this market, but in the meantime, Ross-Castor is a good start."