In the aftermath of Hurricanes Harvey and Irma there’s been increased public attention to both government-sponsored flood insurance (the National Flood Insurance Program, offered through FEMA) and the potential rise of a private flood insurance market. In Florida, a recent analysis by the Associated Press found that of the state’s 38 coastal counties, only 42% of homes are covered by flood insurance. The same analysis found that of the roughly 2.5 million homes in Special Flood Hazard Areas, Florida’s overall flood insurance rate for hazard-zone homes is just 41%.
Flood risk continues to be one of the most difficult perils to price for the homeowners industry. More than any other catastrophic peril, flood risk varies over short distances; critical factors that contribute to flood risk include elevation, relative elevation, distance to coast, and distance to river. This spring, Milliman, along with risk modeling firm KatRisk, sought to independently model the feasibility of a private flood insurance market in Florida, Texas, and Louisiana. The infographic below provides some of our findings for all single-family homes in the state of Florida:
Milliman has announced the results of a first-of-its-kind study to assess the feasibility of a private flood insurance market in several key states across the United States. The study, which was conducted in collaboration with risk modeling firm KatRisk, set out to model private flood insurance risk and potential premiums for all single-family homes in Florida, Louisiana, and Texas—which combined account for 56% of National Flood Insurance Program (NFIP) policies in-force nationwide. The study includes all single-family homes in those states, not only those who are currently purchasing flood insurance from the NFIP, and the modeled NFIP premiums do not include the effects of grandfathering. The estimated private insurance premiums were developed using reasonable assumptions selected by Milliman.
Key findings include:
• For all single-family homes, 77% in Florida, 69% in Louisiana, and 92% in Texas could see cheaper premiums with private insurance than with the NFIP.
• In Florida, 44% of homes modeled could see premiums less than one-fifth that of the NFIP, while the same holds true for 42% of homes in Louisiana and 70% of homes in Texas.
• Conversely, private insurance would cost at least double the NFIP premium for 14% of single-family homes in Florida, 21% in Louisiana, and 5% in Texas.
• Across Special Flood Hazard Areas (SFHAs)—the high-risk zones in which flood insurance is mandatory—private insurance could offer cheaper premiums than the NFIP for 49% of single-family homes in Florida, 65% in Louisiana, and 77% in Texas.
The catastrophic rainstorms in Louisiana in 2016 are one example of the devastating financial effect flood can have on communities outside mandatory purchase areas. “A thriving private insurance market would provide wider and in many cases less expensive options that could protect more U.S. consumers, expand the awareness of the need for flood insurance, and spread the risk beyond the NFIP,” the report says.
To view the complete report including additional findings and critical assumptions, click here.
Advances in catastrophe models and new state insurance regulations have opened the door for an affordable, risk-based private insurance market in Florida. This reading list highlights articles focusing on various issues and implications related to the market. The articles feature Milliman consultants Nancy Watkins and Matt Chamberlain, whose knowledge and experience is helping insurers to understand and price flood risk more precisely.
• Forbes: “The private flood insurance market is stirring after more than 50 years of dormancy”
The reemergence of private flood insurance has piqued the interest of carriers seeking to enter the market. Some catastrophe (CAT) modeling companies are creating flood models to help insurers price policies. Here’s an excerpt:
Nancy Watkins, a principal consulting actuary for Milliman, likened the current level of interest from insurers to enter the private flood insurance market to popcorn.
“We are at that stage where you can hear the space between pops. You can hear one kernel at a time,” she said. “What I think is going to happen is, in one to two years, there’s going to be a lot more going on.”
• Bradenton Herald: “Important for homeowners to compare flood insurance options”
Florida homeowners must consider the issues related to the National Flood Insurance Program (NFIP) and private flood policies. Private insurers can use predictive modeling technology to determine a home’s distinct flood risk.
• Tampa Bay Times: “Remember the flood insurance scare of 2013? It’s creeping back into Tampa Bay and Florida”
Real estate and insurance experts comment on the possible effects that high flood insurance rates may have on homeowners. Insurers express interest in the granular modeling of flood-prone territories.
• Tampa Bay Business Journal: “Why some Tampa Bay property insurers are offering flood coverage and others are not” (subscription required)
Insurers need to weight the risks and rewards associated with the underwriting of flood insurance. A few carriers have already decided to participate in Florida’s private flood insurance market.
Insurers have been cautious about reentering the homeowners flood insurance market, which is due to high risks related to floods. In his Best Review’s article “High water mark,” Milliman’s Matt Chamberlain discusses the reasons behind the industry’s trepidation. He also provides perspective on how geographic information systems (GIS) can help insurers develop granular rating plans. Here is an excerpt:
There are several reasons why flood has been considered an uninsurable risk. First, flood is a localized peril; a distance of a few hundred feet, or less, can make a large difference in risk. This produces an information asymmetry, because the insured has a clear understanding of the local topography, while the insurer does not. The insured knows how far the house is from water, and whether it is on the top of a hill or if it is in a depression.
Insurers, on the other hand, typically use large rating territories for homeowners insurance, in some cases larger than a county. If these territories were to be used for flood insurance, it would create the potential for adverse selection. Insureds that were at highest risk of a flood would be most likely to want the coverage, and if insurance companies do not have a means of distinguishing higher-risk from lower-risk policies, anti-selection would result….
Geographic Information Systems, when coupled with the new flood catastrophe models to provide a very granular rating plan, may help insurance companies overcome these risks. Territories can be based on “hydrological units,” or watersheds, so that areas that water is not likely to flow between are not grouped together. Within a territory, appropriate rating factors are distance-to-coast (relating to storm surge risk), distance-to-river/stream (relating to river flood risk), and elevation (because all else being equal, there is lower flood risk at higher elevations).
Using all of these rating factors produces a rating plan that is able to distinguish different levels of risk even among points that are near each other. This produces true risk-based pricing that is likely to be sustainable in the long run. The top map at right shows this approach and compares it to the traditional method of rating flood insurance used by the NFIP, shown at bottom.
The video below presents an example of how GIS can improve pricing strategy.