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Help for Insurance Agents: How to Write a Preferred Risk Policy

This article was excerpted from the National Flood Insurance Program's Watermark newsletter.


Michael McFadden, NFIP Bureau and Statistical Agent

Converting a standard-rated NFIP policy to a Preferred Risk Policy (PRP) because of a map revision has become possible for the first time, thanks to some of the semiannual program changes documented in the October update of the NFIP Flood Insurance Manual.

That item tops a short slate of changes effective October 1st. Complete details are provided in the October revisions supplement to the Flood Insurance Manual.

PRP Conversion
The PRP is the NFIP's low-cost insurance product for owners and tenants of eligible buildings in low-to-moderate risk B, C, and X Zones located in NFIP Regular Program communities.

In the past, a standard-rated A Zone or V Zone policy could be converted to a PRP only to correct a rating error made when the policy was issued. There was no provision for converting a standard-rated policy when a flood map revision made it eligible as a PRP.

Cancellation/Nullification Section
Effective October 1st, key changes in the Flood Insurance Manual's Cancellation/Nullification section have broadened the circumstances in which a standard-rated policy may be converted to a PRP:
  • Cancellation Reason Code 22, "Cancel/Rewrite," has been reworded as "Cancel/Rewrite Due to Misrating."

  • A new Cancellation Reason Code 24,"Cancel/Rewrite Due to Map Revision. LOMA, or LOMR," has been added.

Now, when a flood map revision, Letter of Map Amendment, or Letters of Map Revision makes a standard-rated policy eligible as a PRP, the agent may convert the policy to a PRP with a mid-term cancel/rewrite.

Detailed information about codes 22 and 24, new procedures for PRP conversion, and required documentation can be found on pages CN 6-7 of the October revisions supplement. Also, see the "Implementation Criteria" box below.

PRP Section
In the manual's Preferred Risk Policy section, pages PRP 2 and 4 have been revised in accordance with the changes in the Cancellation/Nullification section involving codes 22 and 24.

Actually, this process began in the May reissue of the Flood Insurance Manual, when part of the wording of subsection "IX. Endorsements" was changed and all of subsection "X. Cancellation/Nullification" was revised as "X. Conversion of Standard Rated Policy to PRP Due to Misrating or Map Revision."

That phased-in revision process as been completed for October. The affected portion of the text now is organized into the following subsections:
  • IX. Endorsements

  • X. Conversion of Standard Rated Policy to PRP Due to Misrating [This subsection describes uses of revised Cancellation Reason Code 22.]

  • XI. Conversion of Standard Rated Policy to PRP Due to Map Revision, LOMA, or LOMR [This newly added subsection describes uses of new Cancellation Reason Code 24.]

Bottom-Line Concerns
With standard-to-PRP conversions likely to become more frequent in the future because of the October 1st introduction of code 24, flood insurance agents and WYO companies may well wonder how this will impact them. Accordingly, the NFIP has decided that, when converting a standard-rated policy to a PRP because of a map revision under code 24:
  • The agent will retain full commission on the canceled standard-rated policy; and

  • The WYO company's expense allowance for the standard-rated policy will not be reduced.

Implementation Criteria for New Cancellation/Nullification Reason Code 24, Effective Oct. 1st, 2005

The following rules apply to conversion of standard-rated policies to PRPs under new Cancellation/Nullification Reason Code 24:
  • The flood map revision, LOMA, or LOMR must have become effective on or after February 1st, 2005.

  • The standard-rated policy will be cancelled and rewritten as a PRP back to the date when the policy was issued.

  • WYO companies will use "New/Renewal Indicator Z" to report the new PRP to the NFIP Bureau and Statistical Agent for TRRP Plan processing.

  • Paid premium for the cancelled standard-rated policy will be applied to the new PRP. All excess premium will be refunded to the policyholder.

  • The 30-day waiting period will not apply to the new PRP.

Michael McFadden has worked with flood insurance for more than 7 years as a member of the NFIP Bureau and Statistical Agents Technical Assistance and Communications Department.

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