Although flood insurance is in for a blissfully quiet April with few major NFIP changes, the program is set to expire in just six months.
What’s next for flood insurance beyond the short-term reauthorization timeframe? As massive debt continues to loom heavy over the NFIP, a swell of private markets is targeting flood business—and sophisticated mapping technology continues to make it easier for the entire insurance industry to get its arms around flood risk.
“For the first time, I can really say the industry has a lot of innovation that’s going on,” says Keith Brown, chairman of Aon National Flood Services. “The tools out there to evaluate risk, private products, the NFIP itself—we’re looking at an exciting time for flood insurance.”
In 2016, five flood-related events exceeded $1 billion in losses each, according to CoreLogic’s Natural Hazard Risk Summary and Analysis—and despite another relatively light year for large catastrophes, last year’s flood losses totaled $17 billion, which is six times greater than overall flood damage in 2015.
“Given the increase in the flood losses we’re seeing, the NFIP is not sustainable in its current state,” says Howard Botts, chief scientist at CoreLogic. “We’re seeing a tremendous push in every discussion we’ve had to try to push more and more of the flood risk back into the private insurance market.”
Brown adds that flood insurance has only 4-6% penetration among homes that purchase homeowners coverage, when “really it should probably be more like 15-20%,” he says. “It’s a big growth market all the way across the board, and private insurers are starting to really look at this as a greenfield space where they haven’t looked at in that way before.”
As the NFIP has been forced to raise premiums and tack on fees, “it makes the price point so high that private options out there are in many cases better and cheaper, and easier too because they don’t have as many hoops to go through,” Brown explains. “There are more and more private product offerings out there, and it’s only going to get more and more diverse in the coming years.”
But what happens to the NFIP if policyholders begin to swarm the private marketplace? “There are those who are concerned that a strong private market cannibalizes the NFIP,” Brown says.
“The NFIP itself helps fund the mapping program, helps fund some of the operations aspects of the program and some of the grants,” agrees Bruce Bender, specialist in outreach and risk communication services and a national consultant for FEMA’s Risk MAP effort and recent FloodSmart marketing campaign. “The private market right now uses FEMA maps and NFIP rates. If you take that away, if the NFIP shrinks, you’re making a direct impact on all of that.”
Bender says some organizations, such as the Association of State Floodplain Managers, are trying to figure out whether it’s possible to assess a fee on a private policy “to help continue to fund all of those things.” But the elephant in the room is whether the private market will cherry pick lower-risk properties, leaving the “worst of the worst” to the NFIP. Bender raises the question: “Does Congress want the NFIP to become a market of last choice? If so, you’re going to have really high rates in the NFIP.”
But with a “flurry” of private product releases in just the past two years—most of which provide discounted NFIP rates and do not include any extra policy fees beyond those for excess & surplus lines—comes a number of private insurers who are going after higher-risk zones or even negatively rated buildings, Bender says: “So the worry was that the private market would target the low fruit, but now we’re seeing otherwise.”
Why? How? “The way the available capital is in the space right now, private markets are willing to get into some of the higher-risk areas,” Brown explains.
And that means opportunity will be abundant if agents decide to start offering private market options to flood insurance prospects and clients. “We’ll have to stay tuned to see what the September reauthorization’s going to look like,” Botts says. “But I think there will be more and more opportunities for independent agents to write it in the future as we move into a new world of flood insurance.”
As private markets increase their presence in the flood insurance space, “they also get more and more interested in quantifying the risk they’re taking on, and therefore investing in the both predictive models and historical models,” Brown says. “Those models are going to get better as we go forward with more appetite for taking on the risk, understanding the risk and managing that risk.”
Although mapping technology has already become increasingly sophisticated, incorporating laser-based LiDAR and mountains of granular data on elevation, rainfall, real-time stream gauging and more, most flood maps are currently based on historic data. And as weather patterns continue to change drastically year to year, that’s a problem for flood map accuracy.
“The existing flood mapping program uses engineering-based studies that do a very, very detailed analysis of historic streamflow data,” Botts says. Although he believes the maps “do a good job in what they were intended to do,” those intentions are nearly half a century old.
“When the original NFIP was written, the goal was to define properties that are at risk, and to try to mitigate that risk through floodplain management, zoning and a variety of other things,” Botts explains. “But people have figured out how to work around those rules, or in some cases real-estate interests have won out over planning activities. Whatever the reasons, the number of people at risk has actually become greater rather than less.”
Now, more than half of Americans live in a coastal county, Botts says—“which means we’ve actually increased the level of risk,” he explains. “As we pave over more surfaces, that certainly that adds to the risk.”
Plus, approximately 50% of all flood damage currently results from very intense rainfall events or flash flooding, “which we really didn’t contemplate in the old days when we were primarily looking at river flooding,” Botts points out.
Moving forward, Bender says FEMA is considering implementing something called Rating 2.0, which would provide more representative insurance rates from one side of a high-risk flood zone to the other. Consider a house located in a riverine Zone A that stretches out a mile from the center of the river before becoming Zone X.
“That house right next to that Zone A/Zone X line is getting the same rate as the house right next to the river,” Bender points out. “If you cross over that line, the house next door in Zone X gets a Preferred Risk Policy for $400, and just across the line in Zone A is a house that has to pay $1,400, which is what the house by the river’s paying too. But the risk did not change that significantly.”
And FEMA isn’t the only entity working on improving flood mapping technology. “You’ve got several companies that have modeling out there,” Bender says. “Eventually, you could see companies breaking away from the FEMA maps and coming up with their own rating.”
“We’re starting to put more tools into the hands of individual agents or companies, where they can really look at risk and price that risk in a way that really reflects what the true cost is,” Botts agrees. “A lot of companies we work with are going to start making those available to their agents.”
CoreLogic, for example, assesses an individual structure’s footprint based on property location, elevation and risk of flood, flash flood, riverine, storm surge and more. Then, it calculates a risk score on a 0-100 scale, where anything above 60 constitutes a high-risk property. The technology can also complete a full probabilistic analysis that generates average annual loss for that property—and flows directly into an insurance rating engine.
“These are the kinds of tools the industry is starting to deploy more and more, so that individual agents can be more educated as to what individual property risks are,” Botts explains. “If a house is one foot outside a flood zone, they could steer an individual by saying, ‘Hey, you’re not free of flood risk, but you get a significantly reduced NFIP policy because you’re not in the 100-year flood zone.’”
Having that conversation “really drives the value of going to an independent agent as opposed to online rating,” Botts says. “As we expect agents to be more and more informative, I’m hoping people start to better understand their true risk profile.”
Jacquelyn Connelly is IA senior editor.