Hurricane Michael is approaching the Florida Panhandle on October 10 as very dangerous Category 4 storm. The map below shows the percentages of properties in high-risk counties that have National Flood Insurance Program flood policies. None of the counties most exposed to storm surge have a take-up rate above 32 percent, and in Liberty County, only 0.6 percent has insurance through NFIP.
The NFIP currently has about 85 percent of the flood insurance market which private companies have shunned for many years. But private companies, including innovative new start-ups like the one described here, are now entering the market and giving consumers a variety of options.
We talk a lot about flood insurance at I.I.I. for at least two good reasons:
It’s the most common and costly natural disaster in the United States, with billions of economic losses every year. According to the National Flood Insurance Program (NFIP), 90 percent of natural disasters in the U.S. involve flooding.
A 2016 I.I.I. survey found that 43 percent of US homeowners incorrectly think that heavy rain flooding is covered under their homeowners insurance – and only 12 percent had flood insurance.
Floods happen. Regularly. Even if you’re not in a flood zone – and even if you’re not usually in the path of a hurricane. If your home gets flooded, it will be a financial and emotional nightmare: FEMA argues that only 1 inch of water can cause $25,000 of damage to your home.
Your homeowners insurance won’t cover floods: If you don’t have flood insurance for your home, you probably aren’t covered under your homeowners or renters policies because flood risks used to be considered uninsurable.
To address this lack of coverage, the National Flood Insurance Program (NFIP) was created back in the 1960s. The NFIP is a federal program that provides flood insurance to participating communities. If your community participates in the program, you can often purchase insurance through a private insurer that handles policies and claims on behalf of the NFIP.
Private insurers have also recently begun offering flood insurance outside of the NFIP, as new modeling techniques have helped them get a better handle on the risks and costs.
Flood insurance will usually cover physical losses to your home caused by floods or flood-related events, like erosion – with some limitations (trees and fences aren’t covered, for example). You can also buy coverage for the contents inside your home, making flood insurance a crucial tool to help you get back on your feet.
Because disaster assistance won’t be enough: disaster assistance is often only available if you live in a declared disaster area. And even if you are, the FEMA disaster grant is only about $5,000 per household, a fraction of the average flood insurance claim of $30,000.
Flood insurance pays whether you’re in a declared disaster zone or not.
To learn more about how flood insurance works, see our resources here at I.I.I.:
U.S. insurers are well prepared at the start of the 2018 hurricane season to withstand a significant catastrophe this year after suffering through last year’s volatile hurricane season, according to Fitch Ratings Inc.
Fitch cited a 7.5 percent increase in surplus last year, to a record $765 billion.
Surplus grew thanks to healthy investment gains, Fitch noted, which more than offset hurricane-driven underwriting losses. U.S. insurers ceded a significant portion of catastrophe losses to offshore reinsurers and alternative capital. And much of the flood loss in the Houston area from Hurricane Harveywere borne by the National Flood Insurance Program.
The heavy reinsurance losses did cause the bottoming out of rates in property and catastrophe reinsurance, Fitch indicated, but increases were “not to the degree that many market participants had anticipated.”
A deadly storm system pummeled the southern and central U.S. this weekend leaving many areas flooded. The weather system extended from the Canadian Maritime provinces to Texas, and brought gale force winds and widespread flooding from the northern Midwest through Appalachia.
Flooding will continue to be a threat this week, the Weather Channel reports, as more than 200 river gauges reported levels above flood stage from the Great Lakes to eastern Texas. Floodwaters on the Ohio River in Louisville and Cincinnati are at their highest level in about 20 years.
Flood damage is excluded under standard homeowners and renters insurance policies. However, flood coverage is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers.
Below is a look at the National Flood Insurance Program’s flood insurance penetration rates in just a few of the affected areas. The table illustrates the low penetration rates of flood insurance.
At 12:01 Saturday, the U.S. government shut down. Here is what that means for the National Flood Insurance Program, as taken from the NFIP’s web site (last updated Wednesday):
FEMA and Congress have never failed to honor the flood insurance contracts in place with NFIP policyholders. In the unlikely event the NFIP’s authorization lapses, FEMA would still have authority to ensure the payment of valid claims with available funds.
However, FEMA would stop selling and renewing policies for millions of properties in communities across the nation. Nationwide, the National Association of Realtors estimates that a lapse might impact approximately 40,000 home sale closings per month.
The National Flood Insurance Program returned to the private reinsurance market for 2018, paying $235 million for $1.458 billion coverage from a single flood event.
The coverage limit is 40 percent more than what the NFIP purchased last year ($1.042 billion), and the premium is 56 percent higher than the $150 million NFIP paid last year. The 2017 treaty was the first significant foray for the government insurer into the private sector, and the government recovered the entire $1.042 billion from Hurricane Harvey’s floods.
The structure is a bit different this year. Last year reinsurers covered 26 percent of $4 billion in losses after NFIP retained $4 billion losses. Reinsurers will pay 18.6 percent of the first $2 billion of losses excess of $4 billion and will pay 54.3 percent of the $2 billion excess $6 billion.
Both last year and this, the NFIP gets no protection for the first $4 billion of any flood event – the $4 billion acts similar to a deductible on an insurance policy. After that, the worse the flood gets, the more NFIP recovers, and this year the maximum is $1.458 billion.
A $5 billion flood would result in a recovery of $186 million – $5 billion minus $4 billion is $1 billion and 18.6 percent of that is $186 million.
A $7.5 billion flood would result in a recovery of $1.1865 billion:
For the first $6 billion, the recovery would be $372 million, being 18.6 percent of $2 billion (after the $4 billion “deductible.”)
For the $1.5 billion in losses above $6 billion, the recovery would be $814.5 million, being 54.3 percent of $1.5 billion.
NFIP explains the structure in a press release, with program Director Roy E. Wright adding his thoughts in a blog post.
Harvey was the third worst flood in NFIP’s 50 years, behind Hurricane Katrina in 2005 ($16.3 billion) and Superstorm Sandy in 2012 ($8.7 billion). Harvey has generated 91,514 claims through January 5, according to messaging from FEMA, and 90.9 percent of them have closed. The average payment has been $108,825.
The I.I.I. has more information on floods and flood insurance here.
Replacing the choice to opt-in with the choice to opt-out has proven to be one of the most successful policies to come out of applied behavioral economics. For example, in France citizens are automatically enrolled in the organ donor registry unless they choose to “opt-out.” Only 150,000 people, out of France’s approximately 66 million, have opted out of the program.
A recent McKinsey report suggests that making flood an insured risk on standard homeowners policies in high-risk states and giving homeowners the option to opt-out could generate as much as $50 billion annually in untapped revenue.
Policyholders could decide to opt out of flood insurance, but experience from several markets (terrorism insurance, voluntary retirement contribution, etc.) show many will not.
McKinsey analyzed take up rates for flood insurance in areas most affected by the three Category 4 hurricanes that recently made landfall in the United States — Harvey, Irma and Maria — and said as many as 80 percent of Texas, 60 percent of Florida and 99 percent of Puerto Rico homeowners lacked flood insurance.
“The current opt-in choice design clearly does not work… millions of residents and small business owners are unprotected. The default option—not doing anything—should be one that protects them.” Say the authors of the report.
The I.I.I.’s Michael Barry has been attending the National Association of Insurance Commissioners’ meeting. This week, I.I.I. Daily editor Jennifer Ha picks the week’s most important insurance stories.
Record winds are fanning the flames of three major wildfires in Southern California. Already 200 homes and buildings have been destroyed, and tens of thousands of persons face evacuation.
Damage claims related to the October wildfires that hit the state’s Wine Country have risen to $9 billion. The state tracks the losses reported to major insurance companies, and the recent losses are far greater than any other wildfire outbreak in state history.
The Federal Emergency Management Agency (FEMA) has filed claims with private reinsurers for the full $1.042 billion the agency has in coverage. The claims are being sought to help FEMA recover the losses of the National Flood Insurance Program (NFIP) from Hurricane Harvey. Meanwhile, Congress approved a short-term (December 22) extention for the NFIP.
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