What’s next for flood insurance?

13 October 2017

With huge uninsured losses from Hurricanes Harvey, Irma and Maria, it’s time for the industry to play a much greater role in providing flood insurance. By Josh Darr and Peter Chandler

The three hurricanes broke records. Harvey alone shed the most rainfall from a single storm in the US while Irma managed to sustain the second most powerful winds ever recorded over the longest period of time. Maria, the first category four storm to hit Puerto Rico since 1932, is expected to be the country’s most damaging storm on record.

This all serves as a reminder of how much we do not yet know about the potential of weather-related events.

The three storms were also notable for the extent of uninsured losses. Economic losses from Harvey and Irma combined are estimated as high as $180 billion while modelled estimates point to a US industry loss as much as $70 billion.

Modeled estimates for insured damage arising from Maria range from as low as $15 billion to as high as $85 billion, while economic losses could be double that estimate.

Uninsured losses after flood damage

The size of uninsured losses reflects the extent of flood damage from these storms, much of which is uninsured. Less than 20% of homeowners in Texas and Florida buy flood insurance, and much of this is purchased from the National Flood Insurance Program (NFIP), a federal funded insurer. In Puerto Rico, less than 1% of homeowners buy NFIP flood insurance.

However, the NFIP is not in good shape and, despite recent emergency funding, it will remain under the microscope of Congress for the foreseeable future.

Even before the two storms struck, it was already some $24.6 billion in debt, and Harvey and Irma are expected to push the NFIP further into the red.

The programme can borrow a maximum of $30.4 billion from the US Treasury, leaving it with only $5.8 billion to pay all Harvey and Irma losses. Yet Harvey alone is expected to cost the programme as much as $11 billion.

NFIP was due to expire at the end of September, but it was given some breathing space on September 8 2017 when Congress temporarily extended the programme until December 8 2017.

If Congress fails to reauthorize the programme, or pass another extension by the December deadline, the NFIP will be unable to renew or bind new policies.

The last time the NFIP was up for reauthorization, Congress allowed the program to lapse three times for an aggregate total of 53 days.

Given the lack of available government funding, and that there is no viable reauthorization bill ready for bipartisan support, we must prepare for a world without the NFIP in its current form.

It is also clear that any reform of the NFIP will include a push for the private flood market to develop.

The private flood insurance marketplace has struggled to get traction in the US. One of the big problems faced by insurers is the difficulty competing with the NFIP.

The programme does not actuarially rate premiums while the federal government provides premium subsidies for older properties.

Modeling flood risk

The private insurance market has also been slow to embrace primary flood insurance because it has not been able to model flood risk with the same degree of confidence as it already does with earthquakes or windstorms. But this situation is changing.

Big strides in flood risk modelling in recent years should enable insurers to write more primary flood insurance in the US. With cloud computing and a more vibrant catastrophe modelling sector we are seeing much higher resolution flood models, making for more accurate pricing of flood risk on a property-by-property basis.

More accurate models are already helping reinsurers and insurers get more comfortable with flood risk. For example, in January, a consortium of 25 reinsurers provided $1 billion of reinsurance to the NFIP.

JLT Re believes the private flood market represents the largest opportunity for growth in the US property industry given that there are billions of premium dollars paid to the NFIP each year and that demand will increase significantly if the NFIP is not reauthorized in its current form.

Please contact Josh Darr on +1 312 637 6108 or email josh.darr@jltre.com; or contact Peter Chandler on +1 415 930 9081 or peter.chandler@jltre.com

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