For many producers, the National Flood Insurance Program (NFIP) has been the only name in flood insurance, barring a few private products backed by the Lloyd’s of London market. Since 1968, agents have registered with NFIP to sell flood insurance policies, and with largely just one player in the industry, rates were generally fixed.
However, legislation beginning with the Biggert-Waters Act of 2012, implementing regulatory changes and overall rate increases, has led a handful of private insurers to begin testing the market’s waters.
It’s encouraging news for agents, but a new Standard & Poor’s Financial Services report suggests it won’t be the tidal wave of interest many are hoping for.
In “Privatizing US Flood Insurance: A Trickle-Down Effect, or Opening Floodgates?” S&P suggests the losses incurred from Hurricanes Katrina and Sandy, saddling the program with $23 billion in debt, have kept the NFIP from charging actuarially sound rates, relying instead on the US Treasury as a backstop.
That would make entering the market very difficult for private carriers, who already face a number of obstacles in flood insurance, including a “higher degree of moral hazard and adverse selection problems” than other lines of coverage.
In addition, a lack of accurate flood maps and modeling techniques makes underwriting tough and costly.
“Modeling vulnerability to floods requires granular levels of latitude and longitude,” S&P said in the report.
Inland flooding is particularly difficult to underwrite, as existing models – including hurricane models – only consider coastal flooding risk. Increasingly volatile weather also makes determining actuarially sound rates a challenge.
Carriers would also have to improve their claims-handling capabilities, and altogether would be at risk of downgrades in their financial rating if they entered the market “aggressively without proper underwriting guidelines.”
“At this point, we don’t expect a wave of private insurers to sweep into this market but rather a trickle as insurers would enter cautiously before they become more comfortable with the risks involved,” S&P concluded.
The report did make a small concession for excess and surplus lines insurers, who “may be willing to offer limited capacity.”
For its part, the E&S industry is waiting on the passage of new legislation that would clarify support for surplus lines insurers writing private coverage.
The Flood Insurance Market Parity and Modernization Act, which passed the House of Representatives this spring and awaits consideration in the Senate, grants explicit permission for privately issued flood insurance policies from the E&S market to meet the federal requirement for homes purchased through federally-backed mortgages.
In a special report, A.M. Best said the bill could encourage the private flood market to grow and become a more viable option for property owners and renters.
“Over the past 25 years, the number of NFIP policies in force has more than doubled to more than 5.38 million,” the agency said in a news release. “This demonstrates the increasing need and interest in protecting US properties from risk of flooding as more information has become available about the susceptibility of certain communities to flood from revised flood maps and other territorial reassessments.”
The passage of the flood insurance legislation, then, is a “big step in the right direction” for a more robust, affordable market for flood insurance.
Related Stories:
What the current flood bill in Congress means for the private market
These are the most uninsured and underinsured risks in America: Report
