Yes. Since the bank sent the "option" letter, this must not have been a loan they MIRE'd after 1/1/16. The bank gave the borrower the option to escrow for flood insurance, the borrower accepted and then cancelled. The HFIAA and regulation do not require escrows on loans prior to 1/1/16.
For loans after 1/1/16, flood insurance must be escrowed for the life of the loan, unless an exemption is encountered.