The latest government shutdown was the longest in U.S. history. For the insurance industry, it was also a stark reminder of the many difficulties homeowners face when getting policies via the National Flood Insurance Program (NFIP).
During shutdowns, funding for this program can face delays that may prove devastating for those who need it most. That sense of unreliability — along with coverage caps, technological limitations and recent cost increases — helps explain why government-funded flood insurance declined by roughly 2% each year between 2020 and 2024, according to one report.
Meanwhile, private flood insurance has boomed, with the total number of policies expanding at a rate of 20% during that same period. By some estimates, private companies now hold as much as 12% of all flood insurance policies.
It's a trend that shows no signs of slowing, especially with the risk of dangerous floods increasing, bringing greater — or in some cases, newly realized — threats to homeowners across the country.
Below, we'll explore what this change means for insurers, including why it's happening, what makes the situation unique and how providers can prepare for the consequences.
Why is private flood insurance on the rise?
Many of the reasons for the private flood insurance boom can be found in the shortcomings of the NFIP, which has provided federally funded coverage for Americans since 1968.
Today, the program is in trouble, with over $22 billion in debt and an inextricable dependence on a Congress that is regularly in strife. While it's too soon to know the full consequences of the most recent government shutdown, it's estimated that over 120,000 home sale transactions were affected due to policy delays (flood insurance is sometimes required by mortgage lenders when properties are in flood-prone areas).
And, frankly, that's far from the worst-case scenario because it only involves delays for those seeking a new policy. What about those who need to file a claim during a shutdown? Those claims are often delayed and can go totally unpaid until the government reopens, if all previously allocated funds run out.
Meanwhile, accepting these risks and the unreliability of NFIP coverage offers policyholders no protection from skyrocketing costs. Thanks to changes in how rates are calculated, NFIP premiums have surged in some parts of the country. NPR highlighted one flood-prone area of Louisiana where costs increased by an average of over 500%.
This particularly hurts new customers, who may move to an area with a high flood risk — or realize their current home is now at an increased risk — and face much higher rates than expected. Plus, longstanding policyholders may have benefited from subsidies that lowered rates in the past, while newcomers get no such relief.
The good news is that the private flood insurance market has grown because it recognizes these issues and is able to bring reliability, flexibility, competitive rates and new features to the landscape. With an estimated 95% of new policyholders now eligible for coverage via a private provider, there are plenty of ways for homeowners to shop around for an option that suits them best.
What are the biggest benefits?
One of the biggest innovations private insurers have made is to create higher coverage limits, provided policyholders are willing to pay for it. Under NFIP, coverage is capped at $250,000 for residential buildings and $100,000 for their contents. These limits were last increased over a decade ago, and don't provide the level of coverage that some homeowners — especially those in high-risk areas — want.
And, perhaps most importantly, private coverage can still offer competitive rates. Research from Neptune Flood Insurance indicates that around 60% of policyholders would pay less in the private market than they would with NFIP.
While those may be the marquee benefits, they're not the only ones. Private insurers are also able to offer better, more efficient and — in the event of another government shutdown — more reliable claims processing than NFIP, bringing all the technology and know-how of the modern digital marketplace.
For many homeowners, this means not just a better customer service experience, but also improved coverage, with providers using advanced analytics and mapping to create bespoke, fairly priced policy plans.
Parametric insurance, which has become quite popular in disaster coverage, is perhaps the best example of this. By designing claims payouts around set trigger points, like water level or rainfall amount, insurers can guarantee that customers will be paid what they deserve quickly, conveniently and transparently.
What hurdles do providers face?
Still, this fledgling industry is not without threats. Price is one, as providers will need to ensure rates that consistently beat out NFIP in order to secure a true market share.
It's true that most people will save money by going the private route but, currently, not everyone will. Of course, as more people purchase private policies, providers will be able to offer lower rates — but this is where a bigger potential problem reveals itself.
Flood insurance, in general, has a visibility issue. Despite the fact that 98% of U.S. counties have been affected by flooding at some point, only 4% of homes are covered.
This has led to billions in uninsured destruction — for example, only 35% of all flood damage from 2010 to 2023 was covered by insurance — with homeowners often realizing too late that their area was at risk.
Here, private insurers will need to do the work of informing a population that is vastly underinsured and increasingly at risk. This will not be an easy process, but it should involve working with mortgage lenders, state governments and other bodies that help determine who needs flood insurance in the first place.
It will also involve educating the public about the risks. In many areas, the risk of flood damage is substantially higher than fire damage, and yet many homeowners are not prepared.
How can the industry adapt?
Flood insurance is a new frontier for private insurers, and as a result, there's a lot to learn from it.
And even in this short time, there are already takeaways for providers of all kinds. One of the most critical lessons is the way private insurers have dissected a preexisting product — in this case, NFIP — and determined what they can improve on. This philosophy will prove essential as the insurance industry faces worsening severe weather, changing customer expectations and rapid technological change.
If providers fail to keep up, they'll be left behind. And this is especially true when it comes to innovations like parametrics, which have a direct relationship to the customer's bottom line. It will become critical to apply these technologies in the right ways, especially as artificial intelligence quickly transforms the business.
