NFIP update: What P&C insurers need to know

by Jen Smoldt on December 11, 2018

kick the NFIP can

At a glance:

  • National Flood Insurance Program (NFIP) was extended (again) on Thursday, Dec 6
  • This was the ninth short-term extension in 2018, and the eighteenth extension since 2008
  • Congress has until Friday, Dec 21 to pass another extension 
  • A long-term solution remains elusive while the NFIP continues to lose an estimated $1.4 billion each year and remains $20+ billion in debt to the US Treasury
  • Despite the NFIP, the private flood insurance market grew $217 million in 2017

NFIP Déjà vu

Is all of this feeling a little familiar? Just a year ago the NFIP received two last-minute extensions—one on December 8 and another on December 22. It appears the chronic cycle of kick the can persists, and little progress has been made in the NFIP’s reform while more catastrophes, specifically Hurricanes Michael and Florence, have exacerbated the problem. It may seem obvious to the insurance community that the solution resides in more private sector involvement, yet the NFIP continues to grow deeper in debt with no viable long-term solution.

A call for more private sector involvement

While the problem and solution are both complex, one thing is clear: more private sector involvement is needed to right the program and provide policyholders with adequate coverage and fair pricing. Not to mention, increase resilience by limiting the wasteful practice of rebuilding properties in areas vulnerable to flooding. In fact, about 1-2 percent of the NFIP’s total policies are responsible for 30 percent of its claims. As a recent article from The Hill explained:

“The program’s fundamental flaw is that the premiums homeowners pay rarely reflect covered risk. Underpricing policies encourages over-development in areas vulnerable to flooding, while over-pricing deters property owners from purchasing coverage at all. In fact, recent estimates suggest that between 60 and 99 percent of Americans affected by recent disasters did not have flood insurance.”


The private market isn’t waiting

Although challenges still exist, like adequate premium for the risk and educating insureds about their flood risk, the private market isn’t waiting for NFIP reform. Insurance organizations are seizing opportunities now, with the US private flood market growing $217 million in 2017. And, in expanding their flood portfolios, insurers are slowly helping to close the extensive US flood gap made so evident last year by Hurricane Harvey. In fact, it’s estimated that 70 percent of Hurricane Harvey flood damage was not covered by any insurance.

private flood 2017 growth-1-1

Yet despite Hurricane Harvey (or perhaps because of it), Texas is one of the top 10 states leading the private flood market, along with Florida, California, New York, New Jersey, Ohio, Louisiana, Massachusetts, Pennsylvania, and Georgia. These 10 states represent 63 percent of all private flood business written in 2017. Most significantly, Florida with $36 million in direct written premium. But, while private insurers are expanding their presence in these states, the question is, why isn’t it more?

top 10 private flood market states-1

Imagine if the above chart were reversed? A significant opportunity exists for the private market to displace the NFIP. According to Swiss Re, a $10 billion protection gap exists in the US. 

How can insurers feel confident underwriting flood risk? 

The answer: better data and analytics. Flood maps have come a long way and technology is shaping more advanced data and analytics than ever before. This provides insurance organizations looking to tap into the private flood market with more confidence in their risk selection and pricing—so they can expand their portfolios and better serve the millions of businesses and homeowners with no flood coverage whatsoever. Just recently, SpatialKey partnered with JBA on the launch of their 5m flood maps. These are the most detailed flood maps available for Florida and the start of the initial rollout of JBA’s high-resolution maps for the continental US (shown below).

JBA 5m data

JBA’s new Florida Flood Maps, available within SpatialKey, provide a comprehensive view of flood risk at 5m resolution (the highest available in the market today) for all three principal types of flood: fluvial (river), pluvial (rainfall), and storm surge flood hazard.

Getting as granular as possible with flood risk is the only way for insurers to determine the difference between an opportunity and a liability. That’s where up-to-date flood maps and models (as well as models, like JBA, that take more factors into consideration) come into play. Having access to the most up-to-date data is paramount for insurers looking to successfully underwrite flood risk. A centralized hub like SpatialKey, offers access to expert global flood data from KatRisk, SwissRe, JBA, Ambiental, and Impact Forecasting, plus US-specific data from Atkins Global, HazardHub, and FEMA. This provides insurers with the ability to overlay expert data with their own portfolio data to visualize and contextualize risk for the most informed and up-to-date intelligence possible.

It’s also important to be mindful of the impact climate change is having on flood risk. Coastal areas are no longer the only locations deserving of flood coverage. As Insurance Thought Leadership reported, “U.S. inland flood insurance is an untapped source of non-correlated premium unlike any other in the world.” As you get away from the coast and further inland, things like slope, elevation, ground cover, and rainfall all contribute to the intensity of a flood. A solution like SpatialKey offers the ability for insurers to assess and visualize flood risk factors at a more granular level, as well as monitor and manage adverse risk accumulations. Additionally, users can view historical events, such as Hurricanes Matthew, Harvey, Irma, and more, to gauge how a similar event would impact potential new business and help insurers identify optimal locations to underwrite flood.

Bottom line, technology is shaping better data and analytics and providing insurers with the granular-level insight needed to not only take on flood risk with more confidence, but to make flood-prone communities more resilient.  


Topics: flood data, NFIP privatization, Flood risk, flood risk assessment, property underwriting

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