The flood insurance market in the United States is in a state of transition. Until about five-years-ago, the market was totally segmented. Primary flood insurance coverage was exclusively purchased through the federally-backed National Flood Insurance Program (NFIP) – because it was the only viable option in many situations – and then insureds could supplement that, where necessary, by seeking out excess flood insurance coverage from the growing (but still at that time, relatively small) private flood insurance market.
Fast-forward to 2020, through a period with several catastrophic hurricanes and flood events – including hurricanes Harvey, Irma and Maria in 2017, and hurricane Florence in 2018 - and the flood insurance landscape has changed. Today, the Federal Emergency Management Agency (FEMA) and state legislators across the country are proactively pushing for private flood insurers to get more involved in the marketplace in order to supplement the coverage the NFIP can provide. The primary reason behind that is straightforward. The burden being carried by the NFIP, especially when it comes to primary flood coverage, is too extreme to rest entirely on the shoulders of FEMA and the government.
“Greater risk distribution is beneficial to everybody, and we’re starting to see legislation that is pushing to allow that to happen,” explained Brad Turner (pictured), National Product Manager, Flood, Burns & Wilcox. “The flood insurance market is in a state of transition, where the private market is becoming much more heavily involved. That’s not just the case in the excess space; a lot of private flood insurers are proactively marketing what they can do in comparison with the NFIP, which is great. When there’s healthy competition in a segment, not only does it benefit the consumer, but it also benefits the markets by forcing them to take a step forward, to enhance their underwriting techniques, and to incorporate new methodologies to enhance precision.”
“We’re definitely starting to see a transition towards a more competitive flood insurance marketplace,” Turner added. “The markets, backed by supportive legislation, are using new underwriting techniques and technology to underwrite flood risks more proactively, and they’re seeing some success. The NFIP remains the primary source of flood insurance for many insureds, but you’re starting to see more people proactively seeking out private flood as a viable alternative option. It’s an encouraging time to be in flood insurance.”
While the flood insurance market is slowly becoming more competitive, the take-up rate for flood coverage is still far too low. Major weather events in the past few years have been a harsh reminder of this. When Hurricane Harvey made landfall on Texas and Louisiana in August 2017, approximately 80% of victims were uninsured for flood. They ended up shouldering an economic burden of around $37 billion. History repeated itself a year later, when Hurricane Florence hit the Carolinas in September 2018 as a Category 1 storm. Again, the storm caused mainly uninsured flood losses of up to $20 billion.
“As pricing becomes more competitive within the private flood insurance market, I expect the take-up rate will go up – but it hasn’t happened yet,” Turner told Insurance Business. “However, in areas that are already heavily insured with the NFIP – states like Florida, Texas and the Carolinas – we are starting to see more market movement. People are starting to seek out more competitive rating because they now know it’s available. I don’t think that’s helped the take-up rate yet, but the natural progression is that it will in the future.”
When it comes to the NFIP versus the private flood insurance market, there are differences beyond just premium. Where private insurers are offering primary flood coverage, their cover needs to be at least equivalent to what the NFIP can offer. Some are going to market offering exactly the same proposition as the NFIP. Within excess and surplus markets, private flood insurers have the ability to increase coverage limits and add policy endorsements to enhance the coverage further.
“In the private E&S flood market, insurers can offer increased coverage, which can better reflect the exposure of the building and contents across a broader spectrum. They can also write up to [full limits] on the replacement cost, while the NFIP has mandated the maximum coverage it will allow ($250,000 for a dwelling and $500,000 for a commercial property) regardless of the replacement cost,” said Turner. “Excess and surplus lines insurers, because of the support they have behind them, are able to extend coverage levels up to full replacement costs in a lot of circumstances.
“Another important difference can be seen in loss of use and business income coverage. Availability to cover this exposure is not implemented within the NFIP, but, honestly, these indirect losses tend to be the most severe. For example, if somebody loses their primary home and they’re displaced for six to eight months (sometimes into years), you get a situation where they have to stay in a hotel or find some other means to live and feed their families. All of those auxiliary expenses add up and can be detrimental. This type of loss can severely burden somebody financially. Accordingly, having the ability to offer loss of use coverage is certainly a big advantage in favor of the private market.”
Moving forwards, Turner expects more development in private flood insurance forms, with better evaluation of limits and more clarity around what exactly is covered and excluded. As the market progresses, it is advisable for policyholders and brokers to partner with a specialty provider, like Burns & Wilcox, which has the expertise and tools to properly evaluate and advise.