Raghuveer Vinukollu, Nat Cat Solutions Manager, Munich Re America
As we begin 2018 and approach the National Flood Insurance Program (NFIP) reauthorization date of Jan 19th, this is an important time to share key insights on the future of flood insurance and how we, as a community can best achieve flood resilient communities in the U.S.
Insurance plays a major role in developing resilient communities. There are studies that
highlight the importance of high insurance penetration and the correlation to strong resilient countries. So where do we stand in terms of flood resilience in the United States? From a flood insurance penetration standpoint, we are behind the curve. Post Hurricane Harvey, it came to light that a staggering 80% of the homes in Houston were not insured for flood1. The flood insurance penetration rate was not much better in NY and NJ during Superstorm Sandy 2 . Note that these are coastal states where hurricanes and extreme flooding events are common and where homeowners and businesses should be more aware of the risks. Across the country, according to the Insurance Information Institute, only about 12% of homeowners in the U.S. purchase flood insurance3.
Exacerbating the situation is the fact that an extremely large number of Americans are living in one in 100 year flood zones, or areas that have a 26% chance of flooding over the course of a 30 year mortgage. A recent study by scientists and engineers from University of Bristol and Princeton University revealed that approximately 40 million Americans are living in 100 year flood zones4. This corresponds to $5.5 trillion of property value! In contrast, only 5 million policies are in force by the NFIP5. This protection gap is significant and can have a major impact on the economy as there is a direct impact on tax payers money and thus the overall GDP.
Part of the solution for this flood insurance protection gap is better communication of the risk. Unfortunately, Flood Insurance Rate Maps (FIRM), the official flood maps in the U.S., are not frequently updated and are binary in nature (i.e. either you are “in” or “out” of the flood zone). Both Sandy and Harvey events showed several instances of FIRMs being inadequate to evaluate the extent of flooding. The FIRMs designate the flood risk at a point in time and do not reflect the changing risk of the property. Flood models and flood tools have developed well past the. outdated FIRM methodology and can inform more risk appropriate pricing.
The 21st Century Flood Reform Act, which provides a package of NFIP reforms and has been passed by the US House of Representatives, is a good start toward improving flood risk awareness. FEMA would have to use, apart from the applicable FIRM, other appropriate risk assessment models, data, and tools to communicate flood risk. FEMA must also consult governmental agencies like USGS and NOAA to obtain information relevant to flood insurance mapping.
The bill also includes requirements in order to increase consumer choice through private flood insurance market development. This includes broader coverage offerings, removing the non-compete clause restricting Write Your Own (WYO) companies from selling private flood insurance, and allowing a policyholder to switch between NFIP and the private flood market. The private market is unlikely to take on NFIP properties that have incurred multiple flood losses, or “repetitive loss properties”, so the bill fortifies the solvency of the NFIP by limiting coverage and charging premiums that reflect the actual flood risk of those properties. While these are some of the proposals that the U.S. House has passed, the final decisions and changes are yet to be approved by the full Congress.
In May 2017, the Deputy Associate Administrator for Insurance and Mitigation at FEMA, Roy Wright challenged everyone to aim to double the number of flood insurance policies, both NFIP and private insurance by 2023. A goal like this is crucial for increasing the flood insurance penetration, thus making our communities more resilient. While there have been three extensions so far, extending the existing program without meaningful reforms does not improve flood resiliency. We hope that Congress considers meaningful changes, without lapse, to the NFIP with an outlook for a long term reauthorization of the program and a more flood resilient future for the United States.
1 Insurance Business America, Majority of Harvey Victims did not have flood insurance,
2 Rutgers School of Public Affairs and Administration, The Impact of Superstorm Sandy on New Jersey Towns and Households
3 iii, Facts + Statistics: Flood Insurance, October 2017
4 BBC News, US Flood Risk Severely Underestimated, December 11, 2017
5 NFIP Statistics