Opportunities Ahead: A Review of the U.S. Private Flood Insurance Market

It is evident that the opportunities presented by the U.S. private flood insurance market are attracting attention across the industry, and interest in this market is growing. I was recently invited by insurance financial ratings specialist Demotech to be a panelist on their U.S. flood insurance webinar to give an overview and delve into these issues. Joseph Petrelli, president of Demotech was our host, with contributors Fred Karlinsky, co-chair of law firm Greenberg Traurig, and Meg Glenn, consulting actuary at Merlinos and Associates.

The webinar is definitely worth a viewing. Fred started the discussion with an overview of the current state of the private U.S. flood insurance market. The National Flood Insurance Program (NFIP) has towered over the market for the past 50 years, reporting US$3.5 billion of written premium and some 5.1 million flood policies as at the end of September 2018. Florida has 35 percent of all NFIP policies, followed by Texas with 12 percent, and Louisiana with ten percent, with NFIP policies in force in all U.S. states.

Despite the largesse of the NFIP, the National Association of Insurance Commissioners reported strong growth in the private flood insurance market; it reached US$600 million in premiums in 2017, up 57 percent year-on-year. Again, Florida leads, with California, Texas, New York and New Jersey, the top states in terms of private flood premium. The private insurance market is growing in spite of the NFIP, but reforms to the program are needed to truly accelerate that growth.

NFIP and the Path to Reform

Affordable flood insurance has been a hot political issue since the 1960s. With the NFIP effectively subsidizing properties with flood risk, the U.S. Congress has struggled over the years to curtail debts from the NFIP currently running at US$30 billion. Attempts included the Biggert-Waters (BW) Flood Reform Act in 2012, which saw homeowners face steep premium increases as subsidies were cut; then the Homeowners’ Flood Insurance Affordability Act in 2014 reinstated subsidies, capped increases, and even refunded homeowners who had paid higher rates in the previous two years.

As the claims rolled in after Harvey – with some US$11 billion paid by the NFIP, Congress had to clear US$16 billion of the program’s debt. Loss ratios for both the NFIP and the private flood market widened in 2017, the NFIP had a loss ratio at 300 percent, the private market at 164 percent.

As flood losses continue to pile up, it is clear that the insurance market needs to adapt. With the much-postponed reauthorization of the NFIP now due on December 7, will Congress tackle the issues or simply reauthorize again?

Getting Traction in the Private Flood Market

Meg Glenn from Merlinos looked at the routes private insurers were taking to get traction in the flood insurance market. There are three main channels: NFIP Write Your Own (WYO); Excess and Surplus (E&S), and the Admitted market. WYO sees private carriers sell and administer NFIP policies. The carriers themselves take on none of the risk, but receive income for acting as the underwriter.

E&S has been operating for a long time, offering policies that fill in the gaps in NFIP coverage, which has rigid coverage limits such as US$250,000 for residential buildings and US$100,000 for contents. For admitted carriers, they can offer standalone flood policies as well as flood endorsements to property policies. There are more new Admitted entrants, but they face hurdles as they try to satisfy state insurance regulators and mortgage requirements.

Meg first explained the difficulties in setting ratings, with some carriers basing their rates on NFIP, others using flood models to price risks individually. Getting ratings approvals can also be difficult. State regulators are not used to carriers filing flood ratings, and the historical data and even model output can be limited. But encouragingly, there are more insurers overcoming these issues and entering U.S. states as admitted carriers.

Evolution of Flood Analytics

For my part of the webinar, I looked at the evolution of flood analytics, and how the tools and techniques have changed to help support private carriers. Flood insurers instinctively reach for the FEMA Flood Insurance Rate Maps (FIRMs) as a starting point for underwriting. These freely available maps quickly show whether a location is in the Special Flood Hazard Area (SFHA) or is a moderate or minimal flood risk. FIRMs offer an input into the risk assessment process, but were purpose-built for the NFIP program, and perhaps found wanting in many areas for a private insurer. Inconsistent vintages could miss out on population changes, or flood mitigation efforts. These maps also represent a binary view of flood risk, a building is either in or out of a risk zone and does not show the severity of risk.

But how can you build on FIRMs? Data layers that integrate via APIs directly into your underwriting system can provide flood depth, flood susceptibility – such as the presence of basements in a building, or the distance a building is from flooding. These data layers can be useful for risk screening and selection.

Supporting the growth of the flood market, new flood catastrophe models are now able to use the language of risk that is common currency in the more established modeled perils such as earthquake and hurricane. Models such as the RMS U.S. Inland Flood HD Model allow you to link flood hazard with building damageability. This is critical for the flood peril, where building characteristics and flood mitigation efforts must be considered to get an accurate assessment of loss potential.

With private flood market growth, new freedoms from the NFIP to liberate WYO carriers, state regulators becoming more accustomed to private flood carriers, and new analytical tools and models, the conclusion of the speakers and the webinar audience was that the stage is truly set for a period of rigorous private market expansion.