Private Flood Gains Ground as Regulation, Technology Drive Change

OLDWICK, N.J. – The fledgling market for private flood insurance has made gains in both direct premiums written and in the number of insurers offering the coverage, helped by an improving regulatory climate and advances in technology.

Direct premiums written rose 70% to about $702 million from 2016 to 2018, according to AM Best data as of Aug. 7. Prior to 2016, AM Best lacked data on private flood.

The National Association of Insurance Commissioners, meanwhile, tallied more than 120 private flood writers in 2018, compared with about 90 in 2017 and 50 in 2016.

In Florida, 31 entities were approved to write primary flood and six to write in excess of the National Flood Insurance Program, according to a June Best’s Special Report, citing the Florida Office of Insurance Regulation. Direct private flood premium in Florida has increased 67.8% since 2016, to $79.7 million in 2018, according to the report.

This growth comes as new regulation, models, flood maps and tools to measure risk encourage insurers to expand in this market, which has long been dominated by the NFIP.

“There’s been a lot of movement in the past couple of years to help remove some of the impediments to creating a healthy private market,” Matt Nielsen, senior director of global government affairs at RMS told AM BestTV at an RMS Exceedance conference in May.

Two of the big barriers, he said, have been the subsidized rates charged by the NFIP as well as bank regulations that have restricted acceptance of private policies for mortgage lenders.

Flood losses are excluded under standard homeowners and renters policies. Coverage is available under a separate policy from the NFIP and a few private insurers.

The private flood market, however, has begun to grow as these issues are addressed and new initiatives move forward.

“The regulatory community really has embraced the notion that the flood market should look at privatization,” Fred Karlinsky, an attorney with Greenberg, Traurig, told AM BestTV at the RMS conference.

Flooding causes billions in economic losses each year, according to the Insurance Information Institute. Some recent catastrophic flood events include heavy rains and snow melt in the Midwest earlier this year that caused widespread damage to homes, livestock, farmland, roads and bridges. Hurricane Harvey stalled over Texas in 2017, causing unprecedented flooding in Houston while Hurricane Florence in 2018 caused catastrophic flood damage in the Carolinas.

Regulation

Regulation has been a critical issue for the nascent private flood market.

Stability in the insurance regulatory environment is “the ultimate determining factor in the success or failure of private flood,” according to Robert Hartwig, director of the Center for Risk and Uncertainty Management at the University of South Carolina.

Uncertainty at the federal level has long muddied the waters. The NFIP has had $16 billion in debt forgiven but remains $20.5 billion in debt. It has been propped up by short-term extensions, lapsed twice since fiscal year 2017 and is now set to expire on Sept. 30 (Best’s News Service, June 4, 2019).

Some senators are pushing “for a full overhaul of the NFIP system,” said David Blades, associate director of industry research and analytics at AM Best. “If it comes to fruition it would be a huge boom for insurers. Better information is what’s going to help solve some of these issues,” he said.

“The private flood market has been growing in recent years, as insurers have started to develop a better understanding of flood patterns, and modelers have developed more sophisticated tools to measure risk, according to a June AM Best report. “There is also a growing need for more competitive and widely available flood products aside from the government-sponsored National Flood Insurance Program, as its permanence and funding remain in flux.”

The NFIP offers flood coverage to homeowners, but at a subsidized price that makes the private market less competitive. The government has hesitated to allow rates at the NFIP to rise to actuarially sound levels as that would result in rate increases that would impact consumers.

Even so, the industry has been making progress on rates.

“The flood insurance product has been rated the same way it has been since it began,” said Patty Templeton-Jones, president of Wright National Flood Insurance Co. “I think we’re going to start seeing some innovative things come out of NFIP. In October of 2020, NFIP will be introducing Risk Rating 2.0,” she said.

Risk Rating 2.0 will change the way the Federal Emergency Management Agency rates a property’s flood risk and prices insurance, according to FEMA. It would base premiums on individual property risk rather than on whether a home is inside a designated flood plain (Best’s News Service, July 16, 2019).

FEMA said its current rating methodology has not changed since the 1970s. “But since then, technology has evolved and so has FEMA’s understanding of flood risk,” the agency said.

“What they’re hoping that will do is produce actuarially sound rates that will really provide a better view for what the risk is on a rate base for all of the different locations within the flood zone,” RMS’ Nielsen said, noting the private market would then be able to better compete rate-wise with NFIP.

Banking regulations also have been a factor in holding back the private market.

One key development came July 1, when federal regulatory agencies implemented a final rule on the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012. The rule requires lending institutions to accept private flood insurance policies. Previously, only NFIP policies were accepted for homes with loans in designated flood zones.

The regulatory stamp of approval makes the product more appealing to policyholders, AM Best’s Blades said.

State Regulation

At the state level, Florida has the largest and fastest-growing private flood market in the country, according to Florida Property/Casualty Deputy Commissioner Susanne Murphy. The market is supported by a regulatory office that expedites reviews of entrants because it wants to boost the number of flood-insured properties.

“Everyone in Florida is in a flood zone,” Murphy said at a recent conference, noting only about one third of the state’s 6 million properties carry flood protection.

Private carriers in the state wrote 62,000 personal primary flood insurance policies through the end of April, up 169% since June 2017, and at prices similar to or lower than those of the NFIP, according to the Florida OIR.

Florida encourages competition in the line by allowing carriers to file flood rates through 2025 on an informational basis and then react to new information by adjusting prices, according to Carolyn Kousky, executive director of the Wharton Risk Center at the University of Pennsylvania. Roughly 20% of U.S. private residential flood is written in the state.

Modeling

New flood models and maps are also helping insurers to better understand and price flood risk, with AIR, Corelogic, RMS, FM Global and the National Council of Insurance Legislators among the organizations that have developed them.

Scientists from seven universities and tech nonprofit First Street Foundation in June said they will calculate the past, current and future flood risk of every U.S. property then distribute the data for free.

A large percentage of FEMA flood maps are outdated — 11% are from the 1970s or 1980s — incomplete, and fail to take into account changing environmental conditions, said Steven McAlpine, the foundation’s head of data science.

First Street plans a probabilistic flood model that accounts for storm surge and tidal, rainfall, and riverine flooding. It plans to adjust the models to account for anticipated changes, such as sea level rise, increased precipitation, and stronger severe storms, layering the information atop 50-year flood histories on individual houses.

Many insureds would “jump at the opportunity to purchase a multiperil property insurance policy that provides seamless protection against flood damage,” Hartwig said. “The demand has always been there. What differentiates it today is the data, the information, the modeling is there to price the risk appropriately.”

“This represents a multibillion-dollar opportunity for property insurers,” Hartwig said.

However, Blades said the models are progressing slowly. “Just when modelers think they have the answers, the questions change.”

Greenberg Traurig’s Karlinsky said he thinks it’s still moving the needle. “Insurers stayed out of the market when it was poorly understood … understanding rates and risks has been transformational. Modeling advances will increase the appetite for people who want to write this.”

A Growing Market

Direct premiums written in private flood totaled more than $700 million in 2018 — that’s up from just $413 million in 2016, according to AM Best data as of Aug. 7.

The NFIP, however, provided $1.3 billion in coverage in 2017, according to statistics from FEMA. NFIP policies-in-force have declined from a peak of 5.7 million in 2009 to 5.05 million at the end of April.

The No. 1 writer of private flood in 2018 was FM Global with a market share of 42.71%, according to AM Best data.

Assurant US, the No. 2 writer, made big gains from 2016 to 2018, with market share rising to 11.83% in 2018 from just 0.38% in 2016. Zurich Financial went from zero market share in 2016 to become No. 3 with 10.99% in 2018.

“Increased competition is probably a good thing for a natural cat peril. You do need to spread the risk,” said Gary Love, FM Global staff operations underwriting manager and vice president. Increased flood exposure is pushing insurance rates higher, he added.

Palomar Specialty Insurance Co is a new competitor in private flood. It offers an admitted product with dwelling limits up to $5 million, contents coverage up to $1 million and $50,000 loss-of-use in 11 states: Hawaii, California, Oregon, Arizona, Nevada, Utah, Oklahoma, Illinois, Indiana, Pennsylvania and in South Carolina only on properties more than five miles from the Atlantic Coast.

Improved technology enables risk segmentation and a platform that allows distributors to issue a private flood quote in 30 seconds and bind it in two minutes, said Cameron Conboy, Palomar product development assistant vice president.

Love said FM Global has 1,500 engineers complementing its underwriting. “We look at exposures site by site by site. To really know your own exposure you need to know your own site, there are huge differences” in seemingly similar properties.

Private carriers now participate in the NFIP through the FEMA’s Write-Your-Own program in which private carriers administer policies for the NFIP. About 70 WYO companies are listed by FEMA as participating in the program. Under the WYO, carriers are paid to service the policies while the NFIP is responsible for paying out policyholder claims. However, FEMA has been actively exploring ways to grow the private market beyond the WYO program.

Private carriers can also offer more flexibility in coverage limits. The total payout on an NFIP policy typically can’t exceed $250,000 for residential buildings and $500,000 for non-residential buildings, according to the FEMA website. Private flood policies can provide higher coverage limits.

Challenges

Conboy said one challenge for the market is that product demand is soft when it’s optional.

The National Association of Insurance Commissioners surveyed 1,000 Americans in May about flood insurance and found a major disconnect between intention and action. Forty-one percent of respondents agreed or strongly agreed on the need, but just 17% thought they bought it.

The number likely reflects the common misconception that homeowners insurance covers flooding, said NAIC President and Maine Bureau of Insurance Superintendent Eric Cioppa. FEMA estimates the take-up rate for flood insurance is about 3%.

“The key issue is that most people don’t buy flood insurance, especially in flood-prone areas like we are here in Florida,” Rich Fidei, shareholder at Greenberg Traurig, told AMBest TV, speaking at the RMS conference. “The uptake on it is higher in a place like Florida than it is nationally, but it’s still not that great, nowhere near where it should be.”

The NAIC study compared flood insurance buying habits among three generations and found millennials were not only more than twice as likely to recognize the need, they were nearly three times more likely than older baby boomers to purchase the product.

“As an industry we can do more to raise awareness of the tremendous resiliency gap,” Conboy said.

Palomar’s approach to flood echoes its residential earthquake underwriting. Improved technology enables risk segmentation and a platform that allows distributors to issue a private flood quote in 30 seconds and bind it in two minutes, said Conboy.

Renée Kiriluk-Hill