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Emerging Market for Flood Insurance

The federal National Flood Insurance Program (NFIP) underwrites the overwhelming majority of residential flood insurance policies in the U.S. As of April 2018, more than 5 million NFIP policies were in force nationwide (4.8 million residential), representing slightly more than $1.28 trillion in coverage ($1.17 trillion residential). For decades, the NFIP has been homeowners’ only option for flood insurance, but over the past several years a small private market for residential flood insurance has emerged. Policymakers are increasingly interested in learning whether the expansion of this market could help meet the policy goals of increasing the number of homeowners with flood insurance or offering more affordable coverage.

Stakeholders—in congressional testimony, op-eds, reports and other forums—have offered diverging opinions as to the appetite of the private sector in writing more flood insurance, on the existing barriers to private coverage and on the implications for the NFIP. The present state of the market is unclear, particularly because there is no nationwide database on the companies writing residential flood insurance, coverages offered, policy terms, pricing and any differences between private and NFIP flood insurance. This makes it difficult to evaluate the market’s future evolution and relationship to the NFIP.

This report aims to fill these knowledge gaps and has two primary objectives:

  1.  to document the current state of the private, residential flood insurance market across the U.S.; and
  2. to identify the main factors influencing the number and form of flood insurance policies offered by the private market.

To meet these objectives, we conducted in-depth, semi-structured interviews with 63 insurers, reinsurers, state brokers and other market participants. We also gathered and analyzed current private market data from a range of sources, including public documents, congressional testimony, news articles, state regulators and private firms.

See also: Future of Flood Insurance  

Key Findings

  • The private residential flood insurance market in the U.S. is currently small relative to the NFIP. We estimate that private flood insurance accounts for roughly 3.5% to 4.5% of all primary residential flood policies currently purchased.
  • With the exception of Puerto Rico, more policies are written by surplus lines carriers than by admitted carriers subject to state rate and form regulations. This is unsurprising, because surplus lines firms tend to cover new or catastrophic risks for which consumers may have trouble finding coverage in the admitted market.
  • Roughly 20% of private residential flood policies (and 40% of admitted carrier policies) are in Puerto Rico; another roughly 20% are in Florida. No data are available to evaluate the size of the total private market in other states or at a substate level nationwide.
  • Private market growth to date has largely been driven by the interest of global reinsurers in covering more U.S. flood risk. In the admitted market, reinsurers are assuming most of the risk for primary insurers, often in excess of 90%. In the surplus lines market, Lloyd’s of London has played a major role, backing the majority of residential flood policies.
  • Among the small number of policies written by the private sector, we identified three broad policy types. The most prevalent is what we refer to as an “NFIP+” policy within the FEMA-mapped 100-year floodplain, where flood insurance is required for federally backed mortgages. NFIP+ policies have higher limits or broader coverages than NFIP policies. Most are stand-alone policies, although some are sold as endorsements to homeowners policies. A second type is a lower-coverage-limit policy issued as an endorsement in lower-risk areas. The third type, used by only a couple of firms, mimics the NFIP policy.
  • There does not exist data to ascertain how many homeowners previously uninsured against flood are purchasing private policies versus how many are switching from NFIP policies to private coverage. Insurers in the market believe their portfolios include both newly insureds and policyholders switching from the NFIP.
  • Because the NFIP will provide a policy to anyone in a participating community, private firms can operate only where they can price lower than the NFIP or provide broader or different coverages for which there is consumer demand. In a sense, then, the NFIP is a default benchmark for comparison with private flood insurance policies.
  • Companies have identified certain types of properties or risks where they believe they can profitably operate and compete with the NFIP. Those target areas of opportunity, however, vary across firms. For example, some are restricting themselves to areas that FEMA designates as having lower flood risk, and others are focusing on areas that FEMA designates as at higher flood risk.
  • The largest U.S. homeowners insurance companies have generally been hesitant to enter the flood market, although a few have begun to enter through subsidiaries. Their caution, we learned, stems from concern about being unable to adjust rating or policy coverages as they gain experience in writing flood because of state regulatory practices; concentration of risk in their portfolio; correlation of flood with existing wind exposure; satisfaction with the current arrangement; and concern about reputational risk should they need to raise premiums or scale back coverage as they explore the potential flood market.
  • More private capital is now willing to back private flood coverage in the U.S. Interviewees agreed that, as insurers’ familiarity with flood catastrophe models grows, as underwriting experience develops and as state regulatory structures evolve, the number of private flood policies in force could continue to grow, including among admitted carriers. As of this writing, there were multiple new rate filings in many states, suggesting a continued expansion of the market.
  • Whereas the NFIP is required to take all risks, private insurers are selective in their underwriting. All interviewees agreed that the private sector will never be able to write policies for certain properties or locations (e.g., repetitive loss properties or high-tide flooding areas) at a price homeowners would be willing to pay. Substantial public investment in risk reduction, combined with aggressive land-use management, they said, was essential for limiting future exposure and encouraging the private sector to move into those areas.
  • The private market participants we interviewed differed as to how much flood risk in the U.S., and storm surge risk in particular, they thought could be underwritten by the private sector. All agreed there would likely remain a large and important role for the NFIP to play, particularly in the near term.
  • Acceptance of private flood insurance by banks and financial institutions does not appear to be a major constraint on the market at present. With very few exceptions, private insurers have told us banks ultimately accept their products, though they may have some initial questions or concerns.
  • There is a need for expanded insurance agent education about flood risk and flood insurance products, both for the NFIP and private policies. Interviewees disagreed about whether the higher-than-market commissions paid by the NFIP were creating a disincentive for the private market.
  • Most interviewees saw limited demand for flood coverage today, whether offered by the NFIP or by a private provider, and said that consumers were price sensitive.

See also: How to Make Flood Insurance Affordable  

This report was written by Carolyn Kousky, Howard Kunreuther, Brett Lingle, and Leonard Shabman. You can find the full report here.

Low-Risk Doesn’t Mean No-Risk

From “I thought homeowners insurance covered that,” to “I’m in a low risk flood zone, so I don’t need flood insurance,” flood insurance agents have heard all the myths about why homeowners don’t need flood insurance. Unfortunately, these myths often undercut the true dangers of flooding and leave home and business owners across the country woefully underprepared if a flood event does occur.

In 2017 alone, the National Oceanic and Atmospheric Administration reported 16 separate disasters in the U.S., each with damages exceeding $1 billion, which generated total record losses in excess of $306 billion. A large percentage of these damages were caused by flooding, including damages associated with Hurricane Harvey in Texas and Louisiana, and record high water levels in Missouri, Arkansas and Illinois. While this devastation has certainly brought the conversation about flooding and flood damage back to the forefront, it also may have relayed a subtle, worrisome message to others: Flooding events only affect certain regions at certain times of the year, and 2017 was an anomaly.

The reality is quite the opposite.

When it comes to flooding, these disasters can happen any time of the year, anywhere across the country. In fact, 25% of all flood damage in the U.S. occurs in what are classified as low- to moderate-risk flood zones by the National Flood Insurance Program (NFIP), and destructive flood events have occurred in 98% of counties across the country. This is especially troubling when, as the NFIP estimates, just one inch of water intrusion can cause more than $20,000 in damages, and the average NFIP claim is around $43,000. In addition, one-third of FEMA disaster assistance goes to properties in these low- to moderate-risk zones, but it’s rarely enough to cover the damages.

The data from these costly flood events reveals a story of loss and hardship that needs to be more widely understood, and now—with the bevy of new private flood insurance options in place—is the perfect time for agents and organizations to research the facts and widely broadcast the message to the home and business owners they protect.

What Agents Need to Know

Flooding is not restricted to heavy tropical storms. It takes multiple forms that can affect other regions in the U.S., including rapid rainfall or structural failure leading to flash floods, spring snowmelt, changing weather patterns, clogged rainwater systems and new building development. Flooding can even be triggered by drought and wildfires. Why? Because wildfires and droughts alter soil conditions, leading to reduced absorption and increased runoff during any heavy rain that follows.

See also: Future of Flood Insurance  

Simply put, flooding is the costliest and most common natural disaster in the U.S., especially considering that it can strike any time of year. Ultimately, a single flood event can destroy a property and wreak irreparable damage on the finances of uninsured home and business owners. Yet, despite these dangers, only 12% of homeowners have flood insurance. For those in low-risk areas or those without mortgage loans not required by their lenders to purchase NFIP policies, this is a huge problem. Consider the following:

  • A March 2017 survey by InsuranceQuotes found that 56% of respondents mistakenly believed that a standard homeowners policy covers flood damage.
  • Most business insurance policies exclude flood damage.
  • FEMA flood maps may be outdated, and flood risks are changing rapidly. Some research suggests that current maps vastly underestimate those in the high-risk, 1-in-100-year floodplain, with one study suggesting that 40 million Americans, instead of the current estimate of 13 million, are at high risk.
  • Hurricane Harvey hit low-risk flood areas, and fewer than 20% of homes damaged in Hurricane Harvey were flood-insured. In total, just 15% of all the 1.8 million homes in Harris County (Houston) had flood insurance, including only 28% of the homes in high-risk areas.
  • NFIP policies in low-risk, preferred risk areas are as low as $500 a year, while a flood claim averages $43,000.

Collectively, these statistics highlight the importance of flood insurance for all Americans, no matter where they live. As agents, it’s our job to understand the potential risks in our communities and educate clients—and potential clients—on their flood risk to advise them in the best possible way.

What Are the Solutions?

For agents and others in the insurance industry, spreading the flood risk message requires perseverance and a keen understanding of the different insurance products that are available. While it’s important that owners and tenants know their FEMA-assigned flood risk, it’s also key that they understand the shifting nature of flood risk: that the dangers are changing, and every property is at risk at any time of year. Additionally, while government-backed NFIP policies are a critical way for many Americans to secure coverage, they are not the only option. Some homes and businesses may need excess coverage to cover up to replacement cost, and still other eligible properties may benefit from the array of coverage options available with private insurance products instead of an NFIP plan.

That’s why it’s critical for agents to analyze the true needs of our clients and regularly communicate any changes or updates that may be necessary.

The NFIP provides coverage limits up to $250,000 for the structure of a home, and up to $100,000 for personal possessions. For business owners, coverage limits are up to $500,000 for a structure and $500,000 for contents. Depending on the value of their structure and belongings, some home and business owners may need excess coverage, provided by private insurers to supplement their NFIP policies and provide additional coverage options. For example, NFIP policies do not cover additional living expenses—like the rental of a hotel room if a family is displaced from their home—or coverage for basements and pools. Private flood insurance policies, however, may provide coverage for these things and more, to better serve consumers.

Homeowners and renters aren’t the only ones who can be helped by private flood insurance options. Often, much of the focus during catastrophic flood events is on homes and families, but the effect on businesses is just as devastating. Buildings and inventories have been destroyed, computer equipment wiped out and workers left with nowhere to go—and no job left to do. Often, the cost of recovery from a flood is too much for a business to manage, with 40% of small businesses never re-opening their doors after a disaster.

See also: Hurricane Harvey: A Moment of Truth  

The fact is, whether a tenant or building owner, an uninsured company can lose everything in an instant when the water rises. The message agents deliver to business owners needs to mirror the one delivered to homeowners: The risks of flooding are high, and the cost of inaction could be financially unbearable. Agents need to make a special effort to educate business owners on the topic. After all, a company that is willing to invest in anti-theft measures, IT protection and liability insurance should recognize the real financial dangers that floods can deliver.

At the end of the day, private flood insurance options will only be embraced if agents and their clients are fully educated about the risk of flood, the limits of NFIP and all the changing options available. The bottom line is: Flood insurance options are expanding, and we as agents need to understand the full array of flood coverage possibilities available to ensure that those we serve have the opportunity to choose the coverage that will best protect their homes, their families and their businesses.

Private Options for Flood Insurance

Congress has once again extended the current mandate for the National Flood Insurance Program (NFIP). If you have used the NFIP in the past to deliver flood insurance to clients, you know all too well that trying to simplify the complexities of flood insurance in the midst of regulatory changes and extreme weather events is an important yet arduous undertaking.

The industry is filled with constant change, and people need alternatives. This series of guiding questions can help facilitate conversations with your clients so you can work together to thoughtfully explore all options for protecting their property and valued possessions.

7 Guiding Flood Insurance Questions

Does your client need specialized flood insurance coverage?

Consider flood insurance coverage in terms of the specifics of the property and the property owner. Is your client a landlord? Is your client on a fixed income? Is this person holding properties for income-generating purposes? By understanding the needs of your clients, you can more effectively navigate the suite of flood insurance options available today.

Private flood insurance enables property owners to supplement the NFIP product today, providing coverage that homeowners expect from their homeowners policies for exposures such as outdoor property, detached structures, swimming pools and basements.

See also: Future of Flood Insurance  

Does your client have a finished basement or pool?

The NFIP does not cover personal property in basements, so displaced homeowners or homeowners with built-out basements are responsible for these bills. If a storm surge dumps a ton of sand into your client’s pool, is your client prepared to shoulder the costs of the resulting clean-up? By understanding your client’s lifestyle and property usage, you can deliver meaningful solutions. Private options can help.

Does your client’s property value exceed $250,000?

The value of custom-built homes continues to increase, with replacement costs rising well above $250,000, the current limit on government-issued coverage. Now, owners of residential homes have options with higher coverage limits at affordable rates through private flood insurance programs.

Would your client need assistance for additional living expenses if they experience flood damage?

When weighing coverage options remember that the NFIP does not cover additional living expenses. With a private flood policy, your client can opt to add additional living expense coverage. This valuable coverage helps homeowners that have been displaced as a result of a flood by covering the costs of shelter and meals.

Are your client’s personal belongings valued at more than $100,000?

Consider your client’s property holdings beyond the physical structures she owns. For example, if your client is a landlord or holding income-generating properties, she typically doesn’t need contents coverage. However, some clients may need more coverage than what is available from the NFIP to protect their personal treasures.

Would your clients prefer an easy application process without the hassle of submitting photographs or an elevation certificate?

Speed of delivery and streamlined processes of today’s private flood insurance options are increasingly attractive to clients. Plus, property owners can often obtain a quote without an elevation certificate and without providing property photographs.

See also: Time to Mandate Flood Insurance?  

Would you like to save your clients money by avoiding federal surcharges or reserve fund assessments?

Private products are not subject to federal surcharges or reserve fund assessments and may be less expensive to purchase than NFIP flood insurance.

With the NFIP reauthorization debate continuing, Congress struggles to make flood insurance affordable and improve claims standards. Discussions continue around the development and delivery of dependable, disciplined, reliable private insurance to help more people protect their financial livelihood.

Presenting private flood insurance options not only helps your clients make more informed decisions, it enhances the value you bring to your relationship as you work together to help them protect what matters most – their families, homes and treasured possessions.

Today, private flood insurance is available in every state, through multiple channels and multiple locations. Companies have the capacity to step in and offer a suite of comprehensive private options for their clients. Private flood insurance is embedded into many brand name lenders that facilitate a loan closing and help Americans get into their dream home, without interruptions.

Gravity Is Real — You Can’t Ignore It!

For 10 years, I was an instructor of risk and insurance at LSU in Baton Rouge. I’d occasionally be invited to testify before legislative committees as an insurance expert. Often, some of the pending legislation was designed to solve real problems that were not fixable with insurance. In these cases, my testimony was simple. I’d explain:

“Ladies and gentlemen, today, this legislative body has the ability to outlaw the effects of gravity on all state-owned lands. If this legislation is approved, a citizen can jump off the observation deck on the 27th floor and will die EVEN THOUGH IT IS AGAINST THE LAW. Gravity is unforgiving like that.”

The first three examples below are real and, unfortunately, not sustainable in a long-term insurance model because we can’t ignore adverse selection any more than we can ignore gravity. The fourth item is a “scientist” moving from the facts – and becoming (in my opinion) a social engineer acting on feelings.

Consider the brief notes below as an introduction to each issue, not a complete discussion.

1. The Affordable Care Act – I’ll remove the emotion of illness and fairness from this discussion and just look at the numbers. From a Jan. 13, 2017, Wall Street Journal article, see the following statistics:

  • The most expensive 5% of patients use 49% of health spending.
  • The most expensive 20% of patients use 82% of health spending.
  • The healthiest 50% of patients use only 3% of health spending.

Ours is a house divided. 50% of the market is perfect for an insurance model — the other 50% is not, because insurance works when there is a “chance of loss,” not when losses are certain. In a loss-certain model, the No. 1 need is funding — more and more money.

See also: U.S. Healthcare: No Simple Insurtech Fix

2. NFIP (National Flood Insurance Program) – From the Acadiana Advocate (Jan. 26, 2018) see the following headlines: “Hopes for flood insurance deal dim – Another short-term extension expected”

The future of NFIP is threatened by adverse selection. A disproportional number of high-risk buyers populate the pool, and an insufficient number of safe buyers (low-risk properties) exist to assure affordability and thus sustainability.

3. Auto insurance (issues of tort) – In the late 1970s in Louisiana, mandatory auto liability insurance became the law of the land. We can debate the wisdom or appropriateness of this, but it is the law. Today, ours is a house divided – those looking to sue and those fearful of being sued.

Often, our industry invites (and sometimes deserves) lawsuits by being inefficient or ineffective or unreasonable in claims handling. In other cases, lawyers are searching for incidents and accidents that can do more than indemnify a claimant for a loss by creating wealth or at least “over-indemnification” through the courtroom. Our industry is becoming a tort roulette wheel.

On a 140-mile trip from New Iberia to Baton Rouge, I counted 33 billboards for a specific attorney. There were many more for many others. Is this a cost the market is willing and able to pay? How many millions (billions) of dollars are taken out of the risk pool annually for over-litigation? Are we, the premium payers, willing to pay that cost?

4. Fairness in lieu of actuarial science – At its simplest, the insurance process includes four elements. Do these effectively, and you have a green and sustainable business model:

  • Identify the risk to be insured
  • Define the coverages
  • Establish a price (premium)
  • Pay the claims

On Saturday, Jan. 29, 2018, I was driving down a flooded Center Street in New Iberia concerned about the aforementioned flood article and the viability of the NFIP, when I heard a brief portion of a TED talk with Cathy O’Neil titled, “The Era of Blind Faith in Big Data Must End.” O’Neil, a data scientist with a PhD., talked about data being accurate but not being fair.

Actuarial science demands objective data, but our society is starting to demand “fair.” Can these co-exist? Should bad drivers pay more than good drivers? Should health conditions be considered in underwriting life and health policies?

See also: How Advisers Can Save Healthcare  

I believe insurance is a risk-sharing process requiring underwriting, but it is rapidly moving to a “social welfare” platform. The market will get what it wants or tolerates, but as shown above our traditional insurance model may be sacrificed in the process.

What does this mean in your world? Is it sustainable? What are we as an industry and a society going to do? Address the problems now or wait until these systems collapse or go bankrupt?

“A government that robs Peter to pay Paul can always count on the support of Paul.” — George Bernard Shaw

“We have met the enemy, and he is us” — Pogo comic strip

Future of Flood Insurance

Hurricanes Harvey, Irma and Maria laid bare fundamental inadequacies of the current flood insurance program in the U.S. Too few homeowners had flood insurance in place. Federal Emergency Management Agency (FEMA) flood maps were inadequate to encompass actual flood risks and, even more importantly, outreach programs by FEMA and the National Flood Insurance Program (NFIP) were inadequate to properly communicate risks to the market.

See also: Time to Mandate Flood Insurance?  

The current hurricane season revealed an astounding lack of resiliency in the U.S. on many levels: (1) lack of insurance coverages; (2) inadequate mapping of flood risks; (3) failure to properly educate homeowners about their actual flood risks; and, (4) gross under-investment in resilient infrastructure by all levels of U.S. governments.

As Congress prepares to slash budgets and cut taxes, the fact that Hurricane Irma easily topped City of Miami’s sea walls with only Category 1 strength winds and brought a four-foot river of water down Brickell Avenue, the center of Miami’s Financial District, shows how much work needs to be done to achieve resiliency in just one U.S. city.

In its rush to reduce taxes, Congress is ignoring the U.S. infrastructure deficit, which is estimated to be in the multiple trillions of dollars by the American Society of Civil Engineers. The slide deck that I prepared for the Future of Flood Summit discusses new, cost-effective tools for flood risk modeling, flood risk report production and flood risk communication. A central theme is: “Can the insurance industry do a better job of helping insureds and societies cope with the increasing risks they are facing, as our climate changes and sea levels rise?”

You can find the presentation here.