July 6, 2020
A Way Forward on Flood Insurance?
by Paul Carroll
A bright spot has emerged: a major report on flood risk, along with a model that will go a long way toward making assessment more accurate and transparent.
In the mess that is flood insurance in the U.S., a bright spot emerged late last month when First Street Foundation released a major report on the issue, along with a model that will go a long way toward making assessment of flood risk more accurate and transparent.
The report serves first and foremost as a wake-up call. It says, for instance, that 70% more homes are within a “100-year” flood zone than are designated as such by the the Federal Emergency Management Agency (FEMA). That means 6 million households face flood risks they don’t anticipate, yet aren’t eligible for the National Flood Insurance Program. In Chicago, 13% of properties are at risk, according to First Street Foundation’s report, while FEMA puts that figure at less than 1%. The report says Washington, D.C., and Utah have five times the risk that FEMA sees, while Wyoming, Montana and Idaho have four times the risk.
Those sorts of figures are quite the clarion call, but First Street Foundation goes even further by providing the beginnings of a solution: data. Its model evaluates the risk for 142 million properties in the continental U.S., based on an exhaustive array of different inputs that not only are as accurate as possible for today but that project how risks will develop because of climate change. The model lets you search any address for free.
The model from First Street Foundation, a nonprofit research and technology group, should provide short-term benefits while laying the groundwork for smarter long-term policy decisions.
In the short run, potential buyers will understand their odds better and can either pass on a higher-risk property or can mitigate the risks by buying insurance or retrofitting the building. Banks will see the risks more clearly when writing mortgages — and some 30-year mortgages written today will still be in force in 2050, by which point the report projects at least 11% more properties will be at substantial risk of flooding. Insurers will price more accurately. Government — the 800-pound gorilla on flood policy — will have a better handle on what public works to undertake to protect vulnerable areas and what areas to steer clear of because the flood dangers are just too high.
(My entirely unrepresentative check on homes where I’ve lived over the decades struck me as spot on: All were ranked at the lowest level of risk, except for a condo I owned in Hoboken, N.J., that included the ground floor and that, in fact, flooded twice in the decade I owned it.)
In the long run, better information should allow flood risk to be allocated in a mostly rational manner, with homeowners and insurers mostly splitting the liability, but with government in the background to help with out-of-the-blue catastrophes.
We’ve all heard the stories about homes on the coast that get wiped out by storms, then rebuilt, only to be wiped out again, sometimes more than once. Having more accurate data should lead, in time, to underwriting decisions and government policy that reduce or even eliminate such craziness.
First Street Financial describes its report and model as a necessary but insufficient first step. That sounds right. The report is insufficient on its own because lots of other companies and groups will have to finetune the group’s data and, in general, deepen our understanding of flood risk. At ITL, we’ve long appreciated the work done by reThought and Hazard Hub, among others, but many firms will have to step up. And regulators, not known for turning on a dime, will need to become comfortable with using data that exists for each individual property, rather than thinking in broad, imprecise terms like flood plains.
But the report is a necessary, and very welcome, first step.
P.S. Here is an intriguing piece from a sister publication, Risk & Insurance, on how insurance could help address systemic problems in police departments. The idea would be to require that police officers carry professional liability insurance. Police departments would cover the average cost of the insurance, but each officer deemed a high risk by actuaries (based on number and type of civilian complaints against them, for instance) would have to cover the additional premium payments. The hope would be to price bad officers out of work before they could do something that would wind up on the news.
I’m not at all sure the idea would work. Institutional forces such as police unions would resist like crazy, and there is surely enough uncertainty about how to weight risk factors that they’d be able to piece together an argument. But I found the idea innovative, so I figured I’d share the article. Maybe there’s a way to build on the idea.
P.P.S. Here are the six articles I’d like to highlight from the past week:
It’s not all gloom and doom. A crisis usually functions as a great breeding ground for innovation.
Is it reasonable to assume coverage for a COVID-19-related BII claim in the absence of a virus exclusion? The answer has to be, yes.
To modernize at the scale and speed required, ”low-code” application development tools should be incorporated within the enterprise.
Does RFP stand for “Request for Proposal” or “Really Frustrating Process?” Carriers can and must do better.
As insurers develop plans for 2021, the question is, where to start? Traditional processes may need to be supplemented with scenario planning.
Companies with sound ERM practices were better-positioned to deal with the pandemic than those with less sound or no ERM.