The future of flood insurance in the balance

08 November 2018

For a country with a relatively high insurance take-up rate, the US has a surprisingly large flood insurance gap. The Federal Emergency Management Agency (FEMA) reckons that the residential flood insurance market penetration rate in the 100-year floodplain is around 30 percent1.

The poor take-up of flood insurance is even more stark in light of recent events: it’s estimated that less than one fifth of those most affected by 2017’s Hurricane Harvey had flood cover2.

The main reason usually cited for the low penetration is that, for the past 50 years, residential flood insurance cover has only been available through the National Flood Insurance Program (NFIP), which is part of FEMA.

Private insurers have been unwilling – or unable – to compete with the NFIP mainly due to the low rates available to buyers through the program. Other deterrents include the correlation of flood risk with windstorm, state regulatory restrictions and even reputation risk.

But the private flood insurance market is coming to life and it’s happening as FEMA moves to reform the heavily indebted NFIP’s modus operandi.

Congress periodically renews the NFIP’s statutory authority to operate and in July this year it extended the NFIP’s authorization to November 30, 20183. At that point it could choose to help open the door further to private companies.

Appetite for flood risk

Brian O’Neill, Executive Vice President at JLT Re, believes the appetite for flood risk is growing stronger anyway. “Yes, there is definitely a market for private flood. Driving this is the renewed view of the actual flood risk, better modeling, reinsurance capacity, and the ability to provide products to insureds to help differentiate the offering,” he explains.

“In addition, state insurance departments are more open now than in the past to companies providing flood coverage, with Florida leading the way.”

Nancy Watkins, a Principal with actuarial firm Milliman, agrees, adding that some insurers want to develop a flood product to eliminate coverage ambiguity after a hurricane in which damage may have been caused by wind or water.

“It is also a way to potentially increase premium volume without having to attract insureds from competitors, since the large majority of insureds currently do not purchase flood insurance,” says Watkins.

Chubb CEO Evan Greenberg recently stated that the insurance company would be interested in expanding its role in flood insurance if it could charge the right rate.

He told the Wall Street Journal that he would be willing to write substantially more coverage, “if the government allowed private companies to charge an adequate, actuarially sound rate that is matched to the risk”4.

As Watkins points out, much of the capital supporting the growth of private flood insurance comes from the global reinsurance markets: “Reinsurers have made investments in bespoke catastrophe models and related point-of-sale technology, committed new capital to dedicated flood programs, assisted insurers in developing policy forms and obtaining regulatory approvals, directly reinsured the NFIP to reduce its reliance on taxpayers, and advocated for federal and state-level legislative and regulatory reforms to ease private insurer entry.”

Target areas

A big issue for interested insurers is determining rate, according to Pete Chandler, Deputy CEO of JLT Re. “What companies are able to do is determine areas that can be targeted for a stronger product with appropriate rates and coverages, when compared and contrasted to the NFIP offerings.

“This provides a great opportunity for the private market, as they can better assess the risk and, therefore, charge actuarially sound rates; which may even afford homeowners a discount to current NFIP rates in specific geographies.

“With regards to limits, by pricing their products correctly, the private market will be in a stronger position to offer larger limits, which will better align with the value of the risk being insured,” explains Chandler.

Having reliable modeling capability is crucial to achieving sustainable rating, however, and many private insurers are turning to their broker partners for advice.

Flood models

JLT Re works with clients using its proprietary flood models E-FIRMs (Enhanced Flood Risk Rate Maps) and SSRM (Storm Surge Risk Map), as well as vendor models.

JLT Re has conducted model validations on most of the commercially available products.

Its E-FIRMs can identify those properties that are associated with lower flood risk and they have more comprehensive coverage in terms of flood zone look-up and base flood elevation than traditional FIRMs.

E-FIRMs can also assess flood vulnerability and potential flood losses for a one in 100-year flood scenario for any location in the lower 48 States.

Although it may take time to develop, Chandler believes that a balance can be achieved between the NFIP and private carriers so that the flood protection gap can be closed.

“On one hand, private flood insurance can offer some advantages over the NFIP, including more flexible flood polices, higher limit, integrated coverage with all-peril policies, and potentially lower cost.

“Meanwhile, the NFIP may have their niche too. For example, private coverage would not be guaranteed to be available to all floodplain residents,” he says.

Certainly, FEMA is seeking to modernize the NFIP’s insurance product and is redesigning its rating plan accordingly5.

Watkins certainly sees a role for both the NFIP and private carriers in reducing the flood protection gap.

“Private insurers can provide coverage that is not currently available from the NFIP, while the NFIP will offer stable coverage for all risks, including those that may not be eligible for flood insurance in the private market,” she concurs.

For now though, all eyes are on the NFIP’s reauthorization by Congress, which must happen by 11:59 pm on November 30, 2018.


1.       Wharton report, The Emerging Private Residential Flood Insurance Market in the US2

2.       Wharton report, The Emerging Private Residential Flood Insurance Market in the US

3.       FEMA, 08.01.18

4.       Wall Street Journal 08.13.18 Chubb’s CEO on the problem with government flood insurance

5.       Milliman White Paper “What could private flood insurance look like in New Jersey & New York”. July 2018


Brian O’Neill 
+1 813 327 8295

Pete Chandler
+1 415 930 9081