Hurricanes Michael and Florence have again drawn attention to the issue of underinsurance of flood risk in the US. The industry says regulators are stymieing the market, and reforms are stuck in a political logjam. InsuranceERM’s US editor Sarfraz Thind reports
If, as predicted, Michael turns out to be the third strongest hurricane to hit the US, it will follow the path of worsening tropical cyclones to have hit the country in the last few years.
Estimates suggest the hurricane caused $6bn to $10bn of insured damage of which perhaps $0.5bn to $1bn resulted from flood.
Still, from a flood loss perspective, this seems relatively benign compared to last year, when hurricane Harvey in Texas and Irma in Florida caused two of the biggest flooding events in US history, accounting for $10bn of insured flood losses between them.
Despite all this devastation, the country remains massively underinsured for floods.
In Florida, one of the more flood-prone states, only around 15% of people are insured against flooding. Private sector insurers are barely a drop in the ocean. Analysts estimate there are 40m people at risk of flood damage in the US. Yet there was a mere $600m in direct flood insurance premiums written last year — around 10% of the insurable market.
There is no question of insurers not wanting to write business. The desire to grow the private market is there.
“We want to create a long-term viable flood market and back it up with reinsurance,” says Matt Junge, head of property solutions US & Canada at Swiss Re, which has been operating in the US flood insurance market for the last three years. “We see a big opportunity here — we have a number of clients offering this to thousands of homeowners.”
"We want to create a long-term viable flood market"
Swiss Re has seen increased business in the flood reinsurance it provides — even in the last year. Junge says the company currently has eight clients offering coverage with “many multiples of that” in the pipeline.
Meanwhile, rating agency AM Best tracks the market and says 12 more companies wrote flood insurance in Florida in 2017 than 2016. Yet it remains small in the overall context.
Hanging over the market is the government’s much-criticised National Flood Insurance Program (NFIP). The 50-year old programme set up to offer protection for flood-prone homeowners was some $35bn in debt before the government waived $16bn last year. It offers heavily subsidised rates of insurance for residential flood risk, but insurance levels are capped at $250,000 for buildings, and $100,000 for contents, and basements are not covered under the policy.
"People look at the government being in competition with the private sector but I don't see it as a conflict"
NFIP rates had been immeasurably cheaper than what private insurers could offer. But the government has tried to instigate reforms in recent years. Biggert-Waters of 2012 and the Homeowners Flood Insurance Affordability Act (HFIAA) of 2014 were designed to bring the NFIP more in line with private insurance rates. It has partly worked. Private companies say they are finding it easier to compete with the NFIP.
“People look at the government being in competition with the private sector but I don’t see it as a conflict,” says Junge. “The NIFP pricing follows a set rating plan so it is not always cheaper. And only 15% of the market has taken up flood insurance so there is lots of room to expand.”
Locke Burt, president of Florida-based insurer Security First, agrees — according to him 93% of his company’s policies are cheaper than the NFIP. It’s not big business, though. The company wrote $1m of flood insurance last year out of a total of $450m.
Flood models open the market
Improvements in modelling technology have been the main reason why insurers have increased their desire to enter the flood protection market.
“In the past the insured knew more about their insurance exposure to flood risk than the insurers,” says Locke Burt, president of Florida-based insurer Security First. “This is not true today. Models have been improved. Lidar maps can give you elevation of the land which is critical in this.”
But there remain significant hurdles to overcome.
For one, hurricane models only simulate losses from wind and storm surge — but not losses from flooding resulting from torrential rain. On the other hand, pure flood models generally do not map tropical cyclones, which means that one component of the risk is missing.
“The definition issues with the models need to be well understood by users,” says John Rollins, head of the property and casualty team at consultancy Milliman in Tampa. “How do you define storm surge versus inland flow? Is it from a hurricane or not? Is it riverine or pluvial? There is a lot to sort out yet.”
David Blades, senior industry analyst at rating agency AM Best, agrees but feels things are getting better:
“The complexity of flood modelling has been a deterrent — no question of that,” says Blades. “You can have flash flooding, topological flooding because of urbanisation, rainstorms and so on all being the cause. But the increase of people offering it shows there is greater belief in the models now.”
It is perhaps time for regulators to embrace models too.
Biggert-Waters and the HFIAA attempted to make it easier for private insurers by modifying NFIP rates. The next stage has been reform of the flood insurance regulations.
The Flood Insurance Market Parity and Modernization Act seeks to clarify that private insurance is to be treated the same as federal flood insurance in cases where homeowners with federally-backed mortgages are required to buy the coverage. Under this, mortgage lenders have to accept private flood insurance if the coverage provided is at the same level as the NFIP.
It seemed a progressive step and the US House of Representatives passed the Flood Insurance Market Parity and Modernization Act with a unanimous vote in 2016 — but the legislation died in the US Senate the following year. The impasse as it stands is a regulatory one. Politicians remain uncertain and suspicious of opening the NFIP programme further.
“The Senate has not taken up flood reform in earnest,” says Donald Griffin, vice president of policy, research and international at the Property Casualty Insurers Association of America.
“They can’t seem to agree what reforms need to take place. Some in the Senate are concerned the industry will handpick the risks they want and leave the rest to the government. That’s not how our business works. As long as you are charging the right amount, you can take it.”
Much of this filters down to the state level. Many state regulators are unwilling or afraid to embrace flood risk modelling which is so crucial to the private sector entering the market.
“There are huge obstacles to expanding the market,” says Burt, who served as Florida Senator in the 1990s. “State regulation is a primary one. Most state insurance departments are not familiar with models and don’t want you to use them. The rules at the state level need to be clarified because right now, regulation in many states is not conducive to writing of private flood insurance.”
Burt says there is a tremendous amount of reluctance to change. While the industry has been trying to clarify the law in Washington D.C., it has got push back from states — including seemingly progressive ones like New York.
Last year, President Donald Trump signed a three-month extension to the NFIP with the aim of giving Congress more time to come up with a solution. It has not happened. Indeed a year later and the programme is on its seventh extension, due to expire at the end of November.
It is troubling for an industry that has been spending time and money to get into this business.
“The industry wants the reforms to happen,” says Griffin. “But there is the concern that if the reforms were to reintroduce subsidies — which they are trying to get rid of — then if you are a private company you will have gone to a lot of trouble to set up a business and you now don’t have a shot. This will take a long time.”