Flood Insurance Presents Opportunity, Obstacles for Private Insurers

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by Kimberly Tallon
Privatization of the National Flood Insurance Program (NFIP) would present a huge growth opportunity to the property/casualty market, allowing insurers to tap into about $3.3 billion of yearly premiums. But the flood insurance market has a long way to go before it becomes viable for profit-driven carriers and investors, says Deloitte in its newest white paper.

The Deloitte report, “The Potential for Flood Insurance Privatization in the U.S.: Could Carriers Keep Their Heads Above Water?”,  concludes that despite the opportunities flood insurance presents, most insurers will likely pass on taking a piece of the risk unless the obstacles that undermined the NFIP’s solvency and put it $30 billion in debt are dealt with first.

Among those obstacles:

  • FEMA estimates that 20 percent of insured property owners pay subsidized premiums, and many of those properties are in high-risk areas. Underpricing of flood insurance to make coverage affordable might actually be encouraging construction in high-hazard areas.
  • Repetitive loss properties account for a large share of all flood insurance exposures.
  • Convincing property owners to purchase flood insurance remains a challenge. Indeed, only 18 percent of properties in flood zones are believed to have coverage.
  • Many homeowners believe recently updated flood maps may be overstating their flood risks.
  • Property owners with lower flood exposure often pass on the coverage, while those in flood-prone areas may assume that federal disaster assistance will help them if a major flood event occurs.

Congress tried to address many of these issues with the Biggert-Waters Flood Insurance Reform Act of 2012, which reauthorized the NFIP for five additional years. The act included measures to gradually increase rates to match risk as well as to update flood maps, but both the rate increases and revised flood maps have already been challenged by consumers.

Exposure to flood losses across the United States is expected to increase due to climate change, according to FEMA. Having the private market take on some of the risk could be a win-win for taxpayers as well as the insurance industry, Deloitte says, but the challenge is ensuring that any public-private partnership in flood risk is mutually beneficial.

Deloitte suggests some solutions:

  • Private carriers could write a certain level of primary coverage while reinsuring catastrophic levels with the federal government.
  • The NFIP could purchase reinsurance from the private sector, spreading the risk and limiting exposure in high-catastrophe years.
  • The capital markets could help spread risks through the sale of catastrophe bonds.
  • Private insurers could combine their resources and diversify risk through a flood insurance pool.
  • Private insurers could pick up more moderate flood risks, leaving the NFIP in place as the insurer of last resort.

No matter which privatization option is adopted, most industry leaders queried by Deloitte believe the government should retain a role in flood-hazard assessment and mitigation, including the mapping of flood zones as well as the enforcement of zoning laws and building codes to limit flood-related exposures.

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  • April 29, 2014 at 6:30 pm
    earlybird says:

    Wait a minute!! So the NFIP has subsidized premiums for folks that need flood insurance. So what? those folks are creating a real estate market, provide jobs for repair contractors, rental house cleaners and rental agents. We are subsidizing health care for millions of Americans that are not contributing a penny to the economy, but that is acceptable? looks to me that the remapping and increases in premiums by Fema are just another “redistribution of wealth” by the current socialist Washington based administration!!

  • April 29, 2014 at 7:07 pm
    Richard Lowe says:

    Flood insurance should be a mandatory inclusion on every policy! Just like wind damage and tornadoes. That is why it is called insurance. It should not be written to exclude this or that in the fine print!

  • April 30, 2014 at 2:35 pm
    Original Bob says:

    Private Companies writing flood? – only if the State will allow adequate pricing and sound underwriting practices. Many of the same challenges here as in writing the windstorm peril on coastal exposures – inability to adequately spread the risk, adverse selection, difficulty in withdrawing from unprofitable territories when state approval for adequate rates are denied and difficulty in obtaining re-insurance with an on-going stable rate – Off shore RE companies not subject to State Regulations making the admitted private companies the state’s political punching bag. The establishment of a Federal pool as re-insurance for private carriers keeps the Fed in the same position it is today. Companies will Cherry pick leaving the pool with the high hazard subsidized premium risks resulting in the continuation and increases of/in the deficit.

  • May 1, 2014 at 6:58 pm
    expert says:

    Not at all likely that the states or feds will allow “adequate” rates and premiums, and companies will “cherry pick” regardless of any actions to deter or prevent this. While I do see this as just another form of income-equalization or redistribution, we do have to remember that ALL insurance involves a subsidization of the few by the many.

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