U.S. Flood: Why Is Flood Insurance Take-Up So Low?

An Award-Winning U.S. Inland Flood Model

It was off to London’s Savoy Hotel for members of the RMS London team last Thursday, for the Eleventh Trading Risk Awards. And apart from the great hospitality, and the flowing conversation from colleagues and industry peers alike, RMS was also recognized by the award judges, receiving the “Initiative of the Year” award for the RMS U.S. Inland Flood HD model. Without sounding like an Oscar acceptance speech, on behalf of the team that worked on the model, I would like to thank the judging panel made up of representatives from the media and the industry for selecting our entry. Released last October, the flood model is designed to help the private insurance market seize the opportunities presented by this peril, and to also ultimately help accelerate flood insurance take up in the U.S. In a country where hurricanes, tornados and wildfires can dominate the headlines, it is flood that is the most frequent and widespread peril in the U.S. Events range from small, localized flooding to widespread inundation impacting multiple river catchments and basins. The state-backed National Insurance Flood Program (NFIP) – recently extended until the end of September by Congress, dominates the flood insurance market, providing 95 percent of residential flood policies. Even after significant flood events, such as from Hurricane Harvey in 2017, and Florence in 2018, NFIP policy numbers have recently plateaued; the New York Times reports that policies in force are below those a decade ago. In Midwest states, NFIP policies are down by a third since 2011, which has left many uninsured against this year’s ongoing flooding across the region. Flood is underinsured throughout much of the country, where only a third of homes in floodplains have insurance. And of the tens of trillions of dollars exposed to flood, still only a fraction is covered by the private market. With FEMA looking to boost the number of households with flood insurance in the U.S from around five million now to eight million in 2022, what can be done to start to increase flood insurance penetration and to close this growing protection gap? How can private insurers enter the market with confidence and build a flood insurance business which will be profitable and sustainable in the long-term? It is our belief that the insurance industry is currently inadequately served in terms of the accuracy and breadth of data available to achieve this task. As well as accessing accurate flood hazard data, this also extends to data on flood defenses, the first-floor height of a building or the presence of a basement – all key factors in assessing flood risk. There is also a need to use tools that can discern the high-gradient nature of flood extent and severity – and to accurately quantify probabilistic loss to exposures at risk. We believe that the RMS U.S. Inland Flood HD Model does offer a comprehensive and well-validated view of flood risk throughout the contiguous U.S., which can help (re)insurers gain the necessary insights into the range of potential commercial opportunities associated with the private flood market. It captures the risk associated with all aspects of precipitation-induced flooding, including those resulting from tropical cyclone and non-tropical cyclone rainfall, while also accounting for factors that impact rainfall runoff (e.g., groundwater response, surface evapotranspiration, and snowmelt). To capture flooding caused by tropical cyclones, the model is explicitly coupled to the same event set as the market-leading RMS North Atlantic Hurricane Model. Understanding flood risk and how it is correlated with wind exposure, is required for management of an overall book, risk tolerance and accumulations. And thus, it is particularly important to use a consistent view of risk across those aspects and across perils. By linking these models, it has enhanced the development of a truly complete and consistent view of the U.S. flood risk landscape – providing knowledge of how flood is spatially and temporally correlated across all its major sources, including storm surge and the wind peril. Probabilistic modeling is essential, and the proprietary modeling methodology simulates over one million individual events, collectively representing 50,000 years of continuous precipitation, runoff, river discharge, and inundation within and across affected regions. These robust simulations provide a complete characterization of low- and high-severity flood events that could damage property, minimizing uncertainty to inform confident capital allocation, solvency assessments, and pricing based on model output. The model includes simulations of physically plausible flood events capable of causing losses far greater than have been observed historically, allowing (re)insurers to prepare for the potential financial impacts of the next flood catastrophe. Using Innovative Modeling to Fill Critical Data Gaps Flood hazard, vulnerability, and loss are extremely sensitive to building elevation and the presence of basements, which vary geographically across the U.S. When this data is not captured by the user, the model leverages proprietary inventory databases developed from extensive research to infer each building’s first floor height and basement likelihood. The explicit modeling of these two flood-specific characteristics, in addition to other general characteristics (e.g., construction class, occupancy, year built, etc.), helps reduce uncertainty in technical pricing with high-precision, per-location risk assessment. Effective flood defenses also make a crucial difference when assessing flood risk. A major task of the RMS flood modeling team was to take disparate public levee data, which only accounts for a maximum of 20 percent of the nation’s flood defenses, together with the use of a proprietary stochastic modeling technique that accounts for the likely presence and standard of protection of defenses along the entire modeled river network. This gives the option to see defended and undefended views of risk – to establish how the risk is reduced by a flood defense, and also allows users to customize these views, by adding their own defense information or adjusting the model’s default view. Allowing the market to quantify the sensitivities and impacts of various flood mitigation efforts and failure scenarios helps facilitate appropriate flood risk selection, pricing, and portfolio growth decisions throughout the U.S. Gaining confidence and understanding around U.S. flood risk is a sound first step for the insurance industry to move forward and offer innovative coverages to meet the diverse needs of the market. And as the judging panel recognized, the U.S. Inland Flood Model represents real innovation to help achieve this.