REPETITIVE LOSS STRUCTURES

(January 2019)

Most of the NFIP’s policyholders live in the areas of the United States of America that are most prone to flooding: coastal and riverfront property. Flooding, being a catastrophic peril, results in substantial loss whenever and wherever it occurs. Although flood coverage is provided by the federal government, it is still critical that resources allocated to respond to losses be used carefully.

Throughout its history, the NFIP has been seriously affected by the level of loss payments it has made more than once to repair or replace certain properties. These properties are called Repetitive Loss Structures (RLSs) and they represent both a severity and a frequency exposure to the NFIP. In order to have a grasp of how the program was affected, a study was performed by the Congressional Research Service (a branch of the Library of Congress). The study revealed that, over the life of the NFIP program, 1% of the NFIP policies represented RLSs and that group accounted for 30% of the program’s losses. The study also identified several major contributors to RLPs including:

• RLSs typically involve older properties that received grandfathering. In other words, NFIP flood mitigation rules and requirements don’t apply to such structures since they existed prior to the establishment of the programs. So, the premiums charged for such properties are heavily subsidized rates.
• RLSs that suffer only partial losses (less than 50% of their value) do not have to be rebuilt according to floodplain management standards that apply to “substantially damaged” properties. Therefore, their vulnerability to future flood losses is maintained. This creates both a severity and a frequency problem.

Repetitive Loss Structure Mitigation Strategy

Several years ago, the NFIP began  a program to specifically address the disproportional exposures caused by RLPs. The program now has established a set of procedures to handle them. The NFIP, through careful study of its loss data, originally identified roughly 11,000 properties. The properties, because of their high loss exposure, were placed in NFIP Special Direct Facility (SDF). The properties consist of a group that meets one of the following criteria:

• The property has received at least four loss payments exceeding $1,000
• The property has experienced two losses within any ten-year period and the total payment exceeds that property's current value

Example: Don's home in Hi-Waterz Park is insured by a standard property flood policy. The home is insured for its current value of $97,500. The home was severely damaged by flooding in June 2008 ($44,000 paid) and May 2016 ($61,700) paid. Because the home experienced two major losses in a ten-year period and since the total loss payments ($105,700) exceed the home's current value, it is placed in the SDF.

• The property had, in its history (since 1978), three or more loss payments that, collectively, exceed the property's current value.

Example: Jamie's restaurant in Flowington Flats is insured by a general property flood policy. The business is insured for its current value of $223,000. The restaurant was severely damaged by flooding in April 2000 ($113,000 paid), March 2011 ($81,000 paid) and April 2012 ($92,000 paid).  Because the restaurant experienced three major losses with a total payout ($286,000) that exceed its current value, it is placed in the SDF.

Under the NFIP's procedures, an RLS can only receive flood insurance as part of the SDF. The purpose is three-fold:

1. The SDF is a way to closely monitor the group of policies that, by far, represents the NFIP's largest exposure to on-going loss

2. The program intends to put pressure on these policyholders to take advantage of actions that will either mitigate future loss or ideally remove the risk from the SDF.

3. Higher premiums are used for risks in the SDF, assisting in the effort to make the coverage provided under the NFIP justified actuarially.

Since the program’s implementation, RLP numbers have been reduced, though, via annual review of NFIP policies, new RLPs are identified and placed in the program.