This is the first part of a three-part series on the innovation needed in flood insurance.
If you are an insurance agent trying to survive in today’s competitive marketplace, you may have dipped your toes in the flood insurance waters, so to speak. If you have not, get ready to jump in, because there’s a “perfect storm” of opportunity ahead.
Flood insurance is a vastly under-penetrated market. According to a recent report from the Federal Emergency Management Agency (FEMA), approximately 10% of U.S. residential property is located in areas where flood insurance is required for federally backed mortgages, yet fewer than half of these homes carry the coverage. Total penetration in the U.S. is less than 7% for the roughly 95 million residential structures.
That 7% penetration is compelling when you think about the prospective flood universe. Every single state in the country has suffered flood losses. So the question becomes: How do we leverage the opportunity to expand flood insurance beyond those 7%?
When you consider the current state of the industry and of the National Flood Insurance Program (NFIP), the climate is ripe for change. The federal program is upside-down by $23 billion, resulting in additional fees and charges, and the Biggert-Waters Flood Insurance Reform Act of 2012, followed by the Homeowners Flood Insurance Affordability Act, injected new complexities into the NFIP. These — and related — conditions have created a “perfect storm” of opportunity to grow the number of homes that buy flood insurance.
See also: Why Flood Is the New Fire (Insurance)
Taking Advantage of Emerging Private Flood Options
Legislation has paved the way for private flood insurance, which has come in response to different markets having different views and different appetites for risk, and additional measures pending in Congress further clarify the critical role of private flood insurance. Those diverse interests or private markets call for the independent development of product and service solutions to address various flood insurance needs and to differentiate their programs from others. The resulting innovation and product specificity directly benefits consumers. Accordingly, the conversation around flood has really evolved from "What is private flood?" to "Why now private flood?"
One significant challenge for agents will be helping consumers understand that flooding (unlike earthquakes or hurricanes) is the only natural disaster where people actually influence the event itself. Whether through urbanization, the clearing of land for agriculture or artificial levee systems, we influence where floods happen and the severity of floods when they happen. Areas that were not in danger yesterday are exposed today. Private industry has an opportunity to help educate Americans on how these changes drive future flood risk through modeling techniques and data analytics.
We need to help homeowners understand that yesterday’s safety does not necessarily equate to safety today. I see this playing a pivotal role in helping educate homeowners on their true risk of flood.
Getting an Edge in a Competitive Marketplace
Education remains a critical charge for insurance agents who want to obtain an advantage in this evolving market. Agents want loyal customers, and a flood insurance solution represents one more policy that agents can deliver to deepen existing relationships. From my perspective, there are fundamental strategies to employ to your advantage:
- Understand the impact of flood in your area
Every state has been touched by flood, so the risk is widespread. By familiarizing yourself with the history of floods in the areas where your agency is operating, you will better understand the potential impact to your customers.
- Get to know your customer
Does your customer have a man cave in the basement? Is your customer living in a high-value home? Is your customer in a home that is not elevated or that is exposed to flood more than other homes? Is your customer at risk of being displaced for weeks or months at a time if flood happens? That knowledge will help an agent determine what is appropriate for a client and then to match those specific needs with product options in the private market.
- Leverage flood tools available
Take advantage of tools that enable independent assessment of flood risk outside of FEMA flood maps. For example, through www.floodtools.com, agents and homeowners can learn about their potential exposure to flood. By entering an address, they receive an easy-to-understand visual representation of where they are positioned with respect to floodwaters and flood plains.
- Stay current in the evolving product environment
New, more relevant private products are becoming available every day. Staying informed in the changing product environment will help improve your ability to meet the diverse needs of customers with contemporary offerings such as:
—Additional living expenses
—Enhanced basement coverage
—Increased limits for various risk classes
- Be clear on who is backing the product and the capital structure behind it
There is an abundance of capital looking for new business to write. Know who is backing the product and the capital structure supporting the private program. Consider the financial strength and financial rating of the insurer and inquire about flood underwriting experience.
See also: Modeling Flood — the Peril of Inches
Setting Course for the Challenges Ahead
We are seeing a lot of interest in the flood space and the emergence of a host of new products. Many employ a so-called “coupon” approach by offering a percentage discount on the NFIP premium, but they haven’t changed the experience at all. Agents still need to manage extensive applications, an elevation certificate and property photographs. The experience needs to be improved, for the agent and for the customer.
Are there opportunities for agents to sell flood insurance on a larger scale? Certainly, but more work is necessary to make that happen. When it comes to flood insurance, we need to find solutions attractive to both agents and homeowners for the purpose of increasing overall participation. We need to address the existing challenges. Constituents entering this space cannot solely focus on a price-to-coverage configuration angle. Ultimately, without product and service innovation, we can’t expand the market.