As Congress debates changes to the National Flood Insurance Program, private insurers assess whether to enter the flood insurance market.
The devastation of Hurricane Harvey has spurred discussions about the future of the National Flood Insurance Program. Faced with a renewal deadline of September 30 and already burdened with some $25 billion in debt, lawmakers on both side of the political spectrum have proposed legislation to solidify the NFIP’s financial footing.
A common theme among those proposals is increasing private participation in the flood insurance marketplace — a move that Florida has already undertaken. In 2014, the state approved a law permitting private insurers to underwrite flood hazards. The Florida Office of Insurance has since certified nine Florida-based insurance companies to provide flood policies.
A 2014 Deloitte study also noted that several private insurers currently cover excess flood risks. These companies provide coverage above the limits of a NFIP policy, which stand at $350,000 for a residential property and $1 million for non-residential structures.
A recent Rand Corporation report counted between 130,000 and 190,000 privately sold and underwritten flood insurance policies — a small number compared to the 5 million residential policies backed by the NFIP. Nevertheless, in light of the ongoing discussions about NFIP reforms, private insurers are exploring the possibility of entering the flood insurance market on a greater scale.
Better Risk Models
In the past, private insurers hesitated to enter the flood insurance arena due to inadequate risk models. With more robust data now available, however, insurers now possess the tools to properly assess flood risk and set rates. In fact, several NFIP bills currently under review in Congress address the possibility of sharing data.
“Insurance companies for many years did not have that information, and they didn’t have any good way of measuring how risky a house was for flood peril,” Nancy Watkins, Principal Consulting Actuary for Milliman, told the Insurance Journal. “With catastrophe models over the last few years, and with a lot of big data sources coming available that didn’t used to be available, that problem has largely been reduced.”
Another factor that could prod more private insurers into the market are rising NFIP rates. When NFIP premiums rose after 2005’s Hurricane Katrina, rates reached a level more in line with what private insurers would charge, Watkins added.
With regards to rates, a Milliman study done in conjunction with risk modeling firm KatRisk analyzed whether homes in Florida, Texas, and Louisiana that represent more than half of in-force NFIP policies might benefit from private insurance. The research revealed that 77% of all single-family homes in Florida, 69% in Louisiana, and 92% in Texas would be charged lower premiums than those available from the NFIP. “Alongside the NFIP, a thriving private insurance market would provide wider and in many cases less expensive options that could protect more U.S. consumers, expand the awareness of the need for flood insurance, and spread the risk beyond the NFIP,” the report concluded.
Dipping Their Toes
As the Milliman study suggests, the NFIP and private flood insurance will coexist as both spread coverage to more properties in need. G. Michael Sloane, EVP and Chief Marketing Officer at Wright Flood, which offers federal, excess, and private flood insurance, told the Insurance Journal that private insurance will never replace the NFIP, but there is “no doubt” some portion of the risk covered by the federal program could be transferred to the private market.
One way private insurers can make headway in the flood insurance market is by tacking on flood protection to existing homeowner policies, Watkins noted. Water damage, she explained, occurs from a burst pipe or a deluge of rain, not only from a hurricane. By offering homeowners more comprehensive property coverage, and not just for at-risk properties, insurers can increase premiums.
Yet many insurance experts expect the industry will make a gradual dive into flood insurance. For now, many are studying the marketplace or merely dipping their toes into the waters. Chris Grimes, an insurance analyst with Fitch Ratings, told CBS News that it may take up to five years before insurers enter the market in a meaningful way. “We'd see slow growth at the start,” he said, “as private insurers get the necessary data and do their analysis.”