Private Market Looks Closely At Flood Insurance

Almost all private insurers have shunned covering flood since the 1950s, but that could be changing fast, writes Insurance Information Institute (I.I.I.) chief actuary James Lynch:

At the Cat Risk Management 2017 conference I attended earlier this month, flood was the hottest topic. Here’s why:

  • Insurers have become increasingly comfortable with using sophisticated models to underwrite insurance risk, and modeling firms are getting better at predicting flood risk.
  • The federal government, which insures the vast majority of flood risk, is looking for ways to share the risk with private industry. Key reasons:
    • The National Flood Insurance Program (NFIP) owes the Treasury more than $20 billion (thanks to flooding from Hurricane Katrina and superstorm Sandy). It has no practical way to pay that back, and the government has made it clear that it doesn’t want to fund more losses. So the NFIP is purchasing private reinsurance. More on that below.
    • The number of people who lack flood insurance is distressingly high. I.I.I. surveys show that only about 12 percent of Americans have flood insurance. The government wants people to be protected, and encouraging a private flood insurance market could do that.

Here are some of my notes from #catrisk17 on flood insurance:

  • The NFIP reinsurance deal (effective January 1, 2017) means that reinsurance would reimburse NFIP for 26 percent of the losses from an event where losses exceed $4 billion. The maximum recovery is $1.046 billion, and the cost, according to my notes, is $150 million. (If you work in reinsurance it may be easier to think of the pricing this way: NFIP cedes 26 percent of the $4 billion excess $4 billion occurrence layer at a 14.3 percent rate on line.) There have only been a couple of floods that big in NFIP history (Hurricane Katrina and superstorm Sandy), so the cover is in place primarily to protect against storm surge. However, it would cover other major types of flood as well.
  • A significant obstacle to modeling flood risk is the fact that much of the most important data (underwriting and claims information) is in the federal government’s hands. The government wants to share the data responsibly, but its hands are tied by federal rules on sharing data about individuals. The rules are driven both by privacy concerns and cyber security laws. The government will likely be developing a certification process so that professionals could qualify to have access to the data on a limited basis.
  • A live poll found that flood modeling was the most important topic at the conference, cited by 56 percent of respondents – outpacing severe convective (thunder) storm models, cyber insurance models or terrorism models.

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