Over the past year, flood insurance has become more apparent in the media and trade publications. Normally, only catastrophic events (i.e. hurricanes) capture so much attention, but the combination of some massive floods and the continued progress of private flood legislation has started conversations that are overdue. Both the nature of these storms and floods, and their impact on property owners are getting close attention, and that is welcome because it is changing the way people think about underwriting flood insurance.
Recently, Jeri Xu of Swiss Re published an article that illustrates such a change of perception. She offers a very useful way to think of the rain events (what NOAA calls 1-in-a-thousand-year rain storms) that have caused some of the most serious recent floods (i.e. 2016 Texas, West Virginia, Maryland and Louisiana). Because these types of flood-causing storms are localized at the county-level (roughly speaking), and there are about 3,000 counties in the country, it is not unreasonable to expect three flood-causing thousand-year rain storms every year. With this insight, Xu has transformed the extremely rare to the commonplace and reconciled the headlines with the stats.
See also: How to Make Flood Insurance Affordable
A bit of caution is needed when comparing rain events with flood events – for the sake of this argument, let’s assume a millennial downpour does result in flooding (it is not a stretch to say so).
Xu and the headlines are teaching us to stop wondering when a serious flood is going to happen – it is way more important to understand where the damage will be when the serious flood does happen.
The accepted and common way to guess where the flooding will occur is the 100-year floodplain on FEMA’s FIRMs. However, according to this article from David Bull, 85% of the losses in Baton Rouge and Lafayette were outside the 100-year flood plain and uninsured. Clearly, the FIRMs do not help underwriters (or homeowners) understand flood risk (neither where, nor when). Indeed, the FIRMs were never intended for that, as they are rate maps, not risk maps.
Instead, underwriters need information that will help them understand the likelihood of a specific property flooding when there is flooding, because the flood is coming, somewhere.
This approach is comparable to how wind (and, lately, storm surge) is underwritten. Karen Clark & Co. has taken such an approach for hurricane: The software assumes an event (the firm calls them characteristic events, or CEs) and then calculates the expected loss results based on that CE happening. There is good reason for this: Underwriters should assume a handful of hurricanes will land on the coast in a given year, just as they should assume a handful of significant inland flood events should happen annually. Working with that logic makes it less important to wonder when something will happen.
It has long been written about how flood losses occur beyond flood zones. Looking at flood risk by where, not when, is an effective way for underwriters to manage their business while considering this fact. More importantly, it is a view of risk that supports the creation of insurance products that can help narrow the protection gap in the U.S., because it is unacceptable to have 85% of damaged homes (in Louisiana of all places) without flood coverage.