2017 Hurricane Season (and government shutdown) has insurance industry awaiting NFIP decision on private flood insurance

by Jon Sonnenschein on January 24, 2018

At a glance:

  • NFIP lapsed over the weekend as a part of the government shutdown, bill was signed to fund the government through February 8th, which includes an extension for the NFIP
  • NFIP signed a new reinsurance deal with private reinsurers
  • Having the right flood data will be the key to successfully insuring flood risk
Following months of extensions, postponements, hurricanes, and flood-related catastrophes, the NFIP was set to expire on January 19th. Then, on the same day, the government shutdown occurred. Albeit short, the program lapsed over the weekend, and was reauthorized when a bill was signed to fund the government. Now, not just the NFIP, but the whole government, is technically only authorized until February 8th.  While purchasing flood insurance is still possible through the government, the insurance industry is eagerly awaiting a more long-term decision to be made regarding the future of the NFIP. The program, which was $24.6 billion in debt before the 2017 hurricane season, is in dire need of reform. Flood-related events in 2017 sent it further into debt, and although the government recently “signed a $36.5 billion disaster relief bill that will forgive $16 billion in debt owed by the National Flood Insurance Program,” as mentioned by Gloria Gonzalez on businessinsurance.com, it’s doubtful that relief alone is enough to cover the 2017 events.

NFIP already purchasing private flood insurance deals

Just days ago, the NFIP completed a reinsurance deal with 28 private reinsurers to help cover potential 2018 flood losses. The coverage expands on last year’s reinsurance placement of $1.042 billion to $1.46 billion this year, an increase of nearly 50 percent. With the NFIP transferring this financial risk to the private reinsurance market, it seems that it’s only a matter of time before more private insurers (and reinsurers) get involved. NFIP director Roy Wright had this to say: “Recent flooding disasters make even clearer the need for FEMA to share more of the financial risk from flood insurance with the private markets.” He went on to say that, “Expanding the role of the private markets in sharing the nation’s flood risk remains a central tenant of FEMA’s move toward a sustainable financial framework for the NFIP.”

Private flood insurance coming to the rescue, but when?

It’s expected that the private insurance market will get their chance to offer more robust flood insurance packages, something they’ve been anxiously awaiting. The question that begs to be answered, is not if, but when?

With the NFIP in such a state of flux, it’s unclear for many insurance carriers what the next steps will be. The most likely resolution that has seen momentum is to allow private insurers to hunt in what has mostly been the NFIP's private preserve for the last 50 years.” This would completely change the private insurance landscape, as most carriers don’t offer flood insurance as part of a standard policy—it’s typically a separate stand-alone policy or endorsement that is obtained through the federal government. Opening up the market to private insurers is largely seen as a win-win because it allows carriers to select favorable risks, while giving the NFIP the option to defer some of their future losses to the private market. Plus, by going with a private insurer, flood coverage is available in excess of the NFIP’s $250,000 cap, which in some cases can be limiting.

Looking beyond FEMA flood maps

Ensuring that carriers have the right data will be key if new amendments to the NFIP are in favor of the private market. Only 42 percent of FEMA’s maps ‘adequately identified the level of flood risk,’” and FEMA flood maps are the standard that the government has been using for decades. Insurers looking to enter the market, but avoid the same fate that the NFIP met, need more than 42 percent data accuracy. They need precise flood data backed by science that spans the entire country, not maps filled with gaps and holes, where an actual flood zone may be “outside of a modeled zone.” In fact, our clients are finding success beyond FEMA flood maps through the use of expert flood data from providers like Ambiental, Impact Forecasting, JBA, KatRisk, Atkins Global, and HazardHub.

As insurers gear up for 2018 and beyond, and begin planning (likely well in advance) for the 2018 hurricane season, they’ll want to keep flood risk top of mind—both from an underwriting and event response perspective. With months of postponements, and 17 extensions between 2008 and 2012 alone, it’s unclear when the market will be opening to private insurers, but one thing is for certain: the NFIP can’t withstand the volatility of emerging and evolving catastrophes much longer without some element of privatization.

Make sure to reach out to us with any questions about how flood risk is changing and the data you need to successfully write the risk. And, see what some of our data providers have to say about your unique flood risk.

Topics: NFIP reform, Flood Insurance

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