Time to rethink US flood risk insurance

13 March 2017

blue umbrella lying in puddle in front of grey concrete wall

With the National Flood Insurance program in huge debt, how can the private sector help?

Flooding is a growing problem in the US. It is being exacerbated by a growing population; increased population density in flood-prone areas; and more houses and businesses being built in those areas.

Historically, flood risk has been almost entirely covered by the public sector, through the government’s National Flood Insurance Program (NFIP). But after huge losses (particularly in 2005, 2008 and 2012), NFIP is $23bn in debt.

Much of the problem stems from the risk being covered without sophisticated analytical tools, such as maps and catastrophe models. That makes it difficult, if not impossible, to derive actuarially sound rates for NFIP.

A private sector solution

However, there is a viable alternative, says Peter Chandler, Executive Vice-President and Managing Broker at JLT Re North America.

“Intuitively, it makes sense to privatise the product. The reinsurance and insurance industry has the analytical, intellectual and financial wherewithal to tackle this exposure.”

There’s already a small private market: primary carriers are providing flood insurance, albeit on a much smaller, more focused basis. But consumers probably aren’t aware that the private market exists, says Chandler. US banks requiring mortgage customers to purchase flood insurance direct them to the NFIP.

An educational process is needed, Chandler points out: “Our industry should make it known that there are capital and products available, and begin to educate consumers about these options.”

Traditionally, the private market has found it hard to compete with the national Programme, because the government’s rates were so cheap. So there were better places to deploy (re)insurance capital.

But this might be changing, according to Chandler. “Given the huge debt, the government now has a better understanding that actuarially sound rates are of paramount importance.”

First steps

The government has very recently taken a first step towards seeking help from the private sector, by purchasing a small reinsurance cover. Recent legislation has given the Federal Emergency Management Agency (FEMA) the authority to secure reinsurance from the private reinsurance and capital markets.

For its 2016 programme, FEMA is therefore transferring $1 million in NFIP risk to reinsurers.

For the early January 2017 programme, FEMA is still determining the amount of risk to transfer. The organization has stated that while the early January programme will reduce NFIP’s overall risk, the programme will continue to bear the majority of it. It has also made clear that it will take many years to build up a reinsurance programme where the reinsurance markets bear a significant portion of the NFIP’s risk.

Chandler says: “This is a first step towards admitting that the government needs help, and needs a better understanding of flood risk and the true inherent cost of providing that protection.

“As those conversations continue to evolve, it will open the door for the private market to offer alternative products.”


The floods of the last decade or so have underlined the inadequacy of the government’s programme. But they have also highlighted an opportunity for the (re)insurance community. The industry clearly has the financial ability to tackle this exposure, which it may not have had 20-30 years ago.

There is a clear desire from the (re)insurance industry to look at this exposure, says Chandler. Partly because of the industry’s growing sophistication of modelling and analytics, and partly because it represents a new growth area.

“Given the sheer magnitude of the exposures, there will be plenty of opportunity for traditional and non-traditional capital market providers to participate in the programmes that would be created,” Chandler says.

“A lot of catastrophe bond deals are being done. Capital markets are interested in earthquake and hurricane risk, and flood would fit some of their models well. Adding flood exposures would increase the size of the capital pool available, which means more competition, and a more efficient pricing paradigm.”

(Re)insurance provides hybrid forms of capital to clients to help mitigate risks and large losses. And the market has never enjoyed the amount of capital that’s in the industry today, notes Chandler.

“With the market cycle and pricing being soft, flood represents a huge opportunity for (re)insurance carriers and alternative capital providers to deploy some of their capital. And at the same time, to help and educate the government,” he says.

“If there’s a quasi-public/private solution, the (re)insurance community can support the government with the sophistication, tools, and actuarial sciences our industry can bring to bear.”

Please contact Peter Chandler, Executive Vice-President and Managing Broker on +1 415 930 9081 or email peter.chandler@jltre.com