It’s been 10 years since the most expensive disaster in the history of insurance.
When Hurricane Katrina devastated the Gulf Coast in 2010, insurers paid out almost $80 billion in losses, including $16.1 billion in claims to the National Flood Insurance Program. Between Katrina and other storms in 2008 and 2012, the NFIP now owes the US Treasury a significant $24 billion.
As a result, the heavily indebted program is struggling to balance the need for actuarially sound rates and affordable premiums for home and business owners.
Monica Ningen, Swiss Re’s head of property for the Americas and Canada, believes the private market is the answer.
“When the NFIP was created in 1968, the overarching belief was that flood was an uninsurable risk,” Ningen said in a retrospective of Hurricane Katrina. “Due to advancements in technology and scientific knowledge, we’d like to challenge this historical belief.”
Ningen emphasized the resources, global diversity and financial strength of private insurers – backed by reinsurers – as able to create competitive and commercially attractive products for consumers.
“Flood’s the most common disaster in the US, so by addressing the demand for flood insurance we can make a positive impact in closing the significant property insurance protection gap in this country,” she said.
Already, many in the private market are expressing interest in taking on flood risk. Dan Freudenthal, president of Florida-based brokerage Agency Flood Resources, says the opportunity for both insurers and agents in such an environment is great.
“We are seeing that as NFIP costs increase, people are picking up the phone, calling their agent and saying ‘What do you have as an alternative?’” said Freudenthal, who notes that the recent premium increases are the highest he’s seen in 15 years. “In the coming three years, a lot of interesting things well happen. The private flood market is about to burst.”
The road to such a dynamic and sustainable private market, however, is still fraught with obstacles.
NFIP rates are still too low to entice many carriers to offer their own flood products. From 2003 to 2012, annual losses or paid claims through NFIP averaged $4 billion a year while the average amount of premiums written was $2.6 billion.
Getting to rates where even NFIP will break even is vital for a healthy private market, and Brady Kelly – executive director of NAPLSO – doesn’t see that happening in the near future.
“The NFIP rates have been woefully inadequate for a long time. Until NFIP gets real about pricing, the private market can’t compete for risks that currently flow through that program,” said Kelly. “That’s still quite a way off. There are still caps on rates, and a 25% increase doesn’t make them actuarially sound.”