FYI - revised Flood Q&A’s are final!

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20220511a1.pdf

I have poured through this pretty intensely. I notice some pretty significant changes on my opinion of how flood insurance used to be reviewed. One thing that stood out to me is in section 10 regarding the amount of flood insurance required.

The new Q&A offers some sources we can use to determine how much insurance is required. However, in some cases an institution may use the "cost approach" on a loan. There is no language anymore regarding the cost of the land and depreciation. The new Q&A simply says that you can use the cost approach. Since the Mandatory Purchase Guide is no longer supported, is this a change?

Cost approach of the improvements. You cannot insure land. There is no change.

Thank you for the response. Do you have any opinion regarding the value of depreciation?

You cannot require a borrower to over insure a structure. If it is not a primary residence on which the NFIP policy will pay out at Replacement Cost Value, then you are left with requiring insurance up to the Actual Cost Value of the structure(s).

How you can determine an Actual Cost Value without depreciation is really beyond my comprehension.

I do not see the term actual cash value in the Q&A.

No you do not, but pay close attention to Q&A Amount #1: It is very important to calculate the correct insurable value of the property; otherwise, the lender might inadvertently require the borrower to purchase too much or too little flood insurance coverage

I'm going to risk sounding stupid (or perhaps very naive when it comes to insurance companies) but i've always wondered this when it comes to the concept of "too much" flood insurance......are insurance companies just super willing to insure things for more than they're worth, so long as you'll pay the premium? It just seems to me like they should have some culpability in that.

Insurance agents are usually paid on commission - enough said.

We will not even talk about their lack of understanding of the NFIP program.

I get that....but i thought insurance agents still had to run their stuff through underwriters. Not arguing with you, as it must be a thing......but i would have thought that the underwriters would have said something like "we won't pay off $200,000 on a home worth $100,000, so you need to re-write the policy".

NFIP does not go through any underwriters - you pay the premium - you get the coverage.

Ok, good to know.

The new Q & A's don't seem to have an allowance anymore for considering depreciation for commercial buildings as the prior Q & A's did.

AMOUNT 2. What is the “insurable value” of a building and how is it used to determine the required amount of flood insurance?

The insurable value of the building may generally be the same as 100 percent Replacement Cost Value (RCV), which is the cost to replace the building with the same kind of material and construction without deduction for depreciation. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used on a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary), the replacement cost value listed on the flood insurance policy declarations page, or any other reasonable approach, so long as it can be supported.

There does not seem to be an allowance for depreciation here. It seems they are now pretty much solely set on RCV as the "insurable" value for a building.

The insurable value of the building may generally be the same as 100 percent Replacement Cost Value (RCV),

Well, if you are talking about a primary residence, that is true. If you are not, then the insurable value is ACV.

See Question AMOUNT 1:

An NFIP policy will not cover an amount exceeding the “insurable value” of the structure, so the maximum amount of insurance coverage is the applicable limit available under the NFIP or the insurable value, whichever is less.

Previously, I fully agreed. However, the new Q & A's do not have any differentiation between residential and otherwise.

You need to pull out an NFIP policy and read what is covered. The regulators chose to not further define insurable value, other than replacement cost value, as "insurance value" is actually up to the NFIP and it differs depending on the structure.

An NFIP policy will not cover an amount exceeding the “insurable value” of the structure, so the maximum amount of insurance coverage is the applicable limit available under the NFIP or the insurable value, whichever is less.

For Example, this is the beginning of what they will cover. For structures that are not covered under the replacement cost settlement, it defaults to a Special Loss Settlement that covers manufactured homes which has a separate special formula and then to actual cash value for all other structures.

Introduction Loss Settlement

1. This policy provides three methods of settling losses: Replacement Cost, Special Loss Settlement, and Actual Cash Value. Each method is used for a different type of property, as explained in paragraphs a–c below.

a. Replacement Cost Loss Settlement, described in R.2 below, applies to a single family dwelling provided:

(1) It is your principal residence; and

(2) At the time of loss, the amount of insurance in this policy that applies to the dwelling is 80 percent or more of its full replacement cost immediately before the loss, or is the maximum amount of insurance available under the NFIP.

So, even for residential, if it is not a principal residence, then you would use ACV? I feel I may have gave some flood violations in error then when I was an OCC examiner. Not sure most Regulators know the nuances of this because all they generally go off of is the Flood Regulations and guidance issued by the Financial Institution agencies.

That is correct. As far as the regulators not knowing the nuisances, not really sure what to say about that, except bankers should be ready to respond in those cases with facts and push any erroneous findings to a higher level.

Flood Insurance Manual Page 3.39 Note: NFIP uses the term “primary residence” for rating purposes only. NFIP uses the term “principal residence” to determine loss settlement as defined in the Standard Flood Insurance Policy (SFIP). A principal residence is a single-family dwelling in which, at the time of loss, the policyholder or the policyholder’s spouse has lived for either 80 percent of the 365 days immediately preceding the loss, or 80 percent of the period of ownership, if the dwelling was owned less than 365 days. If the dwelling does not meet the definition of principal residence in the SFIP, the NFIP will settle the building losses using actual cash value.

So, basically, it doesn't do much good to insure at 100% RCV amount, assuming that is larger, because the payout would only be on ACV anyway.

That is correct and that is why the Q&A says the following:

An NFIP policy will not cover an amount exceeding the “insurable value” of the structure, so the maximum amount of insurance coverage is the applicable limit available under the NFIP or the insurable value, whichever is less.

The banking agencies have no control over what the NFIP considers the insurable value and as such, you have to look to the NFIP rules to make that determination.

The NFIP could also change that definition at anytime time, so the regulators did not want to fall into the trap of defining insurable value separately in the Q&A.

For example, it is no longer just either RCV or ACV, manufactured homes now have their own formula.

[The banking agencies have no control over what the NFIP considers the insurable value and as such, you have to look to the NFIP rules to make that determination.]

Makes it hard for Bankers to follow as the banking agencies did see fit to establish other Rules related to Flood Insurance. Seems like they want Regulatory Compliance people to also be NFIP insurance agents. So we have to know the Regs, the Q & A, and the 400 page NFIP Manual.