Marsh subsidiary Torrent Technologies, a flood insurance technology and servicing company and direct servicing agent (DSA) of the National Flood Insurance Program (NFIP), recently published a report highlighting the need for public and private sectors to take urgent collaborative action to mitigate catastrophic flood risk in the United States.
“Policymakers, regulators, insurance leaders, and other stakeholders should work diligently to ensure that flood risk does not add to the financial burden the country is facing,” said Kevin Tobin, president and CEO of Torrent. “Action is needed now, especially in light of the extremely active 2020 Atlantic hurricane season and rising sea levels.”
The first and most important thing that needs to happen, according to Tobin, is for Congress to extend the NFIP, which is the main source of flood insurance in the US. Without that reauthorization, no new NFIP coverage will be written, real estate transactions with federally backed mortgages will be placed into jeopardy, and the country’s economic recovery from the COVID-19 crisis will drop down a gear.
“If the NFIP is not extended, many Americans [with homes in designated flood zones] will find it difficult to close on their mortgage unless they find a reasonable private sector flood insurance solution – and the odds are, those solutions will be more expensive than the NFIP at this point in time,” said Tobin. “Making sure that Congress and/or the President extend the NFIP is the first step. Then we need to focus on longer-term reform, with the aim of transforming the NFIP from the provider of last-resort flood insurance to an active partner with the private sector to close the insurance gap.”
While the NFIP remains the foundational element of flood insurance in the US, there has been lots of activity and product development in the private sector in recent years. Private market activity has been most prolific, according to Tobin, among managing general agents (MGAs), who are using reinsurance to identify flood risk areas that they want to go after. They’re typically targeting lower risk states, or those that are less prone to coastal events, and looking to build their flood knowledge and capabilities, including claims adjudication, in areas that are less prone to catastrophic economic and physical disaster.
With more development in the private flood insurance market, one might assume there has been a corresponding uptick in flood insurance uptake. But, this has not yet been the case, according to Tobin. There is still a significant flood insurance protection gap in the US – one that the CEO believes can only be closed with coordination and collaboration between public and private entities.
Explaining the flood insurance gap, Tobin said: “Most individuals don’t understand flood risk and how you insure against it, and most agents, who are the advisors and counsel to individuals and small business, don’t fully appreciate the risk and/or understand it. And then to top it off, the amount of work that’s required from agents in terms of questions that need to be answered and the E&O risk that an agent takes - they just generally stay away from it. If there’s a mortgage that needs to be satisfied with proof of flood insurance, an agent will generally do that on behalf of their customer. But very few agents or agencies actively market flood insurance; it’s generally a backup or a compliment to a property insurance or a small business BOP that’s sold to a client.
“That mix of the complexity of the risk, how infrequently it is quoted and bound by a typical agent, and the challenge of actually completing an accurate quote and delivering an accurate policy are the barriers to there being a larger uptake. One of the keys to increasing the uptake of flood insurance is making the process easier for everyone to understand, and easier for agents to execute.”
Torrent is tackling that challenge in multiple ways. The Marsh subsidiary is in active dialogue with MGAs and reinsurance entities across the country to ensure that the underlying data used in flood risk assessment is accessible, reasonably priced, and that it fits into a process that is easy to accurately quote at point of sale.
“First and foremost, our efforts have been focused on building more awareness and education around flood risk, and then making sure that there’s adequate product in the marketplace to satisfy the need,” Tobin told Insurance Business. “Agents and brokers need to embrace this as a risk that faces almost every one of their policyholders, whether they’re consumers or small business clients. To start off with, they have to understand the risk, and then how the products out there can mitigate it.”