The National Flood Insurance Program (NFIP) desperately needs a bigger premium pot. Without more sustained cash flow, the program might struggle to survive.
Hurricanes Harvey and Irma have only piled more pressure on the program. It has been left to deal with the losses of the many from the premiums of the few, which is a recipe for failure, according to Guy Rawlins, senior vice president, property practice leader, Brown & Riding Insurance Services.
“We need to get more people buying flood insurance. If the only people who buy it are the ones that always have losses, then clearly the NFIP is going to struggle to survive,” Rawlins told Insurance Business. “If we made it easier and more attractive for people to purchase, the program would have a bigger premium pot from which to pay the losses of a few.
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“Take-up rate is largely driven by money-lenders. If lenders only require flood insurance from people inside the 100-year flood zone, then people outside that area (even those very near the border) are unlikely to buy flood insurance because they don’t have to. But the reality is that FEMA flood maps are outdated and flood return periods are coming much faster.”
The rate of development in US towns and cities is constantly increasing. Back in 2001, Tropical Storm Allison devastated southeast Texas and caused dramatic flooding in Houston. Fast-forward 16 years to Hurricane Harvey and the city of Houston has almost doubled in size, resulting in much greater damage and economic impact.
Major development brings more people, a lot more concrete, and the shifting of earth to and from traditional flood plains. The Federal Emergency Management Agency (FEMA) has attempted to address this issue by re-mapping the flood zones – but many in the industry think that more needs to be done.
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One of the more challenging aspects of flood insurance is covering assets with negative elevation in a 100-year flood zone as well as business interruption and time elements which are not covered by the NFIP. This is where the excess and surplus (E&S) markets come into their own, and specialty brokers can offer solutions.
“Elevation is a key thing,” said Rawlins. “A lot of development has been built right on the flood plain – on concrete pads with no elevation. Building codes are important and we need to do anything we can to increase flood protection and mitigation.
“In the US, our barrier islands are beautiful places to live and go to a resort – but there’s a price to pay for wanting to be there. The islands are susceptible to adverse weather and flooding, so insurance and risk mitigation should be a priority. It’s not a Government responsibility, but that’s where the pressure has gone.”
The devastation caused by Harvey and Irma is going to be an eye-opener for the US, according to Rawlins. He said there will be “heightened interest and awareness” in flood, and that people who thought they were remotely exposed in the 500-year flood zone might start to reconsider their risk.
“Flood is clearly a very serious exposure. We get more evidence of this year-after-year but I still find the majority of insureds are tentative to buy flood insurance unless money-lenders push for it,” commented Valerie Martin, senior vice president and property solutions specialist at Brown & Riding Insurance Services.
“Oftentimes, people rely on the Government to come and save the day when they have a flood event. But the fact is, the NFIP is broke and at some point that solution might stop. There needs to be more education around the issue,” she added.
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