Intelligent Insurer: Under water—and out of luck
Spring floods in the US Midwest have underlined the fact that few people in the US have flood coverage. Intelligent Insurer investigates.
“THE MORE PRIVATE FLOOD COVERAGE BECOMES AVAILABLE, THE STRENGTH OF THE INSURANCE INDUSTRY’S DISTRIBUTION NETWORK WILL HELP DECREASE THE PROTECTION GAP.” JOHN HUFF, ABIR
It was a damp spring in the US Midwest, with floods affecting multiple states from Nebraska and Kansas to Texas since March. Losses are still being estimated but Pete Ricketts, governor of Nebraska, has claimed that the flooding has inflicted the worst damage in the history of the state.
It’s too early to tell what the damage bill—or the insurance bill—will be, but the flooding has highlighted one thing: flood insurance is not widespread in this area, or indeed in the US as a whole. In fact for most of the 20th century US flood was considered by many insurers and reinsurers to be close to uninsurable.
There are a number of reasons for this, but the primary ones are cost—flood insurance can be expensive in some states—and the fact that many property owners think they are automatically covered by their existing insurance. In most cases, however, they are not.
In 1968 the US government tried to address the problem of damages from flooding in areas that were designated as flood plains by creating the National Flood Insurance Program (NFIP) to help offer flood insurance to homeowners, renters, and business owners. The NFIP is the primary underwriter of flood insurance policies in the US. It is part of the Federal Emergency Management Agency (FEMA) and has relied on the US Treasury to fund deficits when losses have exceeded the programme’s claims. NFIP has accrued $23 billion in losses to the US Treasury.
It was hoped that NFIP would encourage people to move away from areas that flood regularly, but that did not happen. The NFIP has been criticised as being in need of possible reform as a result of this, as well as the losses.
In the wake of the latest flooding and following the National Association of Insurance Commissioners’ (NAIC) spring 2019 national meeting in Orlando, Florida, the Association of Bermuda Insurers & Reinsurers (ABIR) has encouraged the expansion of the private flood market and state regulation in the US.
Former Missouri director of insurance John Huff, who is now the chief executive officer of ABIR, met with Wisconsin commissioner Ted Nickel and highlighted the devastating impact floods are having on the Midwest, where less than 1 percent of consumers have flood insurance coverage.
Statistics from the Reinsurance Association of America (RAA) show that private flood insurance has been steadily growing in the US, with an estimated $623 million direct premium written in 2018.
Furthermore, the federal banking regulator has finalised rules to make it easier for banks to accept private flood coverage for federally backed home loans, which will go into effect on July 1, 2019.
“There are several reasons why Americans—in the Midwest and the US in general—don’t have private flood coverage,” says Huff.
“First, consumers wrongfully believe their homeowners policies cover flood damage. Flood coverage typically requires an additional rider, endorsement or standalone policy,” he explains.
“Second, consumers wrongfully believe their house is not in a high risk ‘mapped’ flood area, or their mortgage provider doesn’t require flood insurance, so they think they must not need it. Estimates are that 20 percent of flood damage is now occurring in homes not mapped as ‘at risk’.
“Third, consumers wrongfully believe the government will bail them out, if there is flood damage. US law severely limits the ability of the federal government to provide assistance to individual homeowners after a flood.”
What is being done to increase the takeup of insurance?
“FEMA and the NAIC are both undertaking extensive consumer awareness campaigns. Some believe that the more private flood coverage becomes available, the strength of the insurance industry’s distribution network will help decrease the protection gap on homeowners flood risk,” says Huff.
“The joint banking agencies’ rule on acceptance of private flood is effective July 1, 2019 and should help make private coverage more accessible, giving consumers choice.”
Less cash for the NFIP
The call for more private coverage comes in the wake of the decision in January 2019 by FEMA to reduce the size of its annual reinsurance placement for the NFIP.
FEMA placed $1.32 billion of the NFIP’s financial risk with 28 reinsurers for the year, a reduction on the $1.46 billion it placed a year earlier.
However, the January placement complements $500 million of coverage it secured in August 2018 via a placement into the capital markets—in effect, a cat bond. This means that FEMA had transferred $1.82 billion of the NFIP’s flood risk for the 2019 hurricane season to the private sector.
At the end of April FEMA secured an additional $300 million reinsurance placement for the NFIP from the capital markets investors, bringing the total flood cover to $2.12 billion.
Huff says he is energised by the possibilities of expanding flood insurance protection once state insurance regulators and the private market become fully engaged.
“Their influence and work to protect consumers is significant,” he concludes.
“Some ideas may involve ‘mandatory’ offerings of flood coverage to ensure consistent communication at the time of homeowners coverage placement or renewal.”