AM Best shines spotlight on California floods and underinsurance

Numbers point to huge insurance gap

AM Best shines spotlight on California floods and underinsurance

Catastrophe & Flood

By Terry Gangcuangco

California has got the short end of the stick when it comes to flood insurance, as the relevant statistics point to a huge gap in cover.

“After long periods of drought in California over the past couple of decades, the state now has seen its second-straight year of destructive flooding with mudslides,” AM Best associate director for industry research and analytics David Blades said in an emailed commentary.

“The economic losses from the latest round of storms will be significant, and many of these losses may not be insured. Just 2% of California residents have purchased flood insurance, which leaves 98% uninsured.

In Blades’ view, the repeated flooding events in the state will shine a spotlight on private flood insurance.

“Despite the low take-up of private flood insurance, California is still the second-largest state in private flood premium, trailing only Florida,” he noted. “Private flood insurance accounts for almost 50% of California’s entire flood market, a much larger share than other leading states for flood insurance. 

“California, which has about 12% of the US population, accounts for just 4% of policies from the National Flood Insurance Program (NFIP) as well. Even then, many of the homes in California protected by NFIP insurance are likely underinsured.”

Blades, who also cited the changing risk assessment landscape for property insurers, pointed out that the NFIP cap of $250,000 per residence is “well below” the median home value in the state.

The associate director went on to say: “The problem of flooding has been exacerbated by the rising number of homes being built in flood plains and the resulting diminishing runoff areas, leading to greater water accumulation.

“Population growth in wildfire-prone areas in California and other western states also has led to higher economic and insured losses, despite less intense natural catastrophes.”

For AM Best, amid rising availability and affordability issues for consumers, it is now all the more critical to accurately re-assess the nature of the risks that natural and weather-related catastrophes pose to property insurers.

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