United States: Flood Insurance Market Set For Overhaul

This year's devastating floods have highlighted the issue of flood underinsurance in the US Hurricanes Harvey and Irma wrought havoc upon a number of US states in August and September, bringing huge volumes of rain to Texas, Florida, Georgia and South Carolina.

In one day in August, over 40 inches of rain fell in Texas during Hurricane Harvey. Flood insurance in the US is largely taken out through the US National Flood Insurance Program (NFIP), which is a scheme created by the US government which aims to reduce the impact of flooding on private and public structures, by providing affordable insurance to property owners and by encouraging communities to adopt and enforce floodplain management regulations. Despite the NFIP, only 12% of US homeowners have flood insurance and it is excluded from most standard homeowners' policies. Therefore in 2016, US$10 billion of flood losses were uninsured. The figure for 2017 is likely to be far higher. Estimates for the total insured and uninsured residential flood losses from Hurricane Harvey alone range from US$25-US$37 billion and a very significant proportion of this is expected to be uninsured. In these circumstances, efforts are increasing to improve the affordability of flood cover to all citizens.

New legislation designed to overhaul the NFIP is currently progressing through the US legislative bodies. On 14 November, the 21st Century Flood Reform Act (HR 2874) bill passed the House of Representatives by 327 votes to 189 and has now proceeded to the Senate for approval. The Senate have referred it to the Committee on Banking, Housing and Urban Affairs for review. The purpose of the Act is to renew the existing NFIP program for an additional five years beyond its current termination date of 8 December 2017. There are five sections to the bill:

  • Policyholder Protection and Information;
  • Increasing Consumer Choice through Private Market Development;
  • Mapping Fairness;
  • Protecting Consumers and Individuals through Improved Mitigation; and
  • Program Integrity.

Private insurers already increasingly participate in the US flood market to some extent, offering almost all commercial flood insurance (compared to only 10% of the residential flood market), writing insurance in excess of the fixed NFIP limits and offering some specialised products such as cover for condominium units and force-placed floor cover. Some private insurers are already competing with NFIP cover on a direct basis. Hiscox Re and ILS have launched a flood product called FloodXtra, which provides carriers with rates, rules, forms, and an underwriting portal and pricing system. Yet US insurers are "deeply frustrated" at the current state of the US flood insurance market are ready to step in to "make a difference", according to comments made to Insurance Day by Mike McGavick, chief executive of XL Catlin.

Insurers are now closely following the progress of the new bill through the US legislative channels because it potentially increases the opportunities for the private insurance market to participate in insuring against flood peril. One source at Aon Benfield described the opportunity for flood cover to lower risk areas as "an untapped $8bn-plus market". The new Act would change the way that risks are priced with the aim of increasing market competition. The draft bill reforms the current fixed national averages to up-to-date replacement values that are property-specific. This means that the premiums of wealthy homeowners will no longer be subsidised by lower-income families, but those higher-income homeowners will face higher premiums. The bill also allows the US government greater discretion to sponsor a catastrophe bond covering flood risk. These changes may at least in part address the common criticism of the NFIP program that its rules are too antiquated and inflexible. Another common criticism of the NFIP is its substantial cost to taxpayers and it is hoped that transferring risks to the capital markets will help protect US taxpayers.

Flood insurance is not straightforward, requiring highly sophisticated modelling software to understand and price for the risks involved. Indeed, the NFIP has run up substantial deficits in recent years to subsidise low insurance premiums in flood-prone areas and the bill proposes to enable federal government to deny coverage to the riskiest and costliest properties. It appears likely that the private insurance market might take over the provision of insurance to such properties. The market is likely to face a steep learning curve on new products, but the general consensus in the industry is that the potential advantages far outweigh the challenges. The demand for flood insurance is only going to increase. One recent study warned New York to brace itself for severe floods as often as every five years.

Issues surrounding the NFIP and Hurricanes Harvey and Irma were discussed at a panel discussion hosted by HFW's London office in October. Gerard Kimmitt and Sheshe Evans from HFW's Houston Office spoke about the impact of the hurricanes on their communities and Andrew Bandurka considered reinsurance aspects.

A link to our briefing note on the event can be found here. The progress of the 21st Century Flood Reform Act bill can be followed here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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