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.
(click on table to enlarge)
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.
I.I.I. members receive the I.I.I. Daily for the latest insurance-related news for free. Nonmembers can purchase a subscription. Contact firstname.lastname@example.org.
Five years ago this week, Superstorm Sandy pummeled New York and New Jersey bringing with it one of the most devastating flood events in recorded history.
Many homeowners in affected areas lacked flood insurance. The two charts below show current flood insurance penetration rates in areas at risk for flooding.
The October issue of our Latest Studies digest is now available.
In this issue:
- Wharton, The Congressional Budget Office and B.E. Journal of Economic Analysis & Policy all have recent reports on the National Flood Insurance Program
- Lloyd’s of London on the future of cargo insurance
- The latest on marijuana impaired driving from the National Highway Traffic Safety Administration
- J.D. Power on U.S. homeowners insurance customer satisfaction
From January 1, 2017, FEMA – the Federal Emergency Management Agency – secured increased reinsurance protection to share a meaningful portion of the risk of large and unexpected flooding with private reinsurance markets.
This placement of reinsurance transferred $1.042 billion in risk above a $4 billion deductible to 25 reinsurance companies.
Under this agreement, the reinsurers can cover 26 percent of losses between $4 billion and $8 billion arising from a single flooding event.
As Artemis blog reports here, with flood losses from Hurricanes Harvey and Irma on the rise, estimates suggest that the NFIP reinsurance program will pay out in full with losses from Hurricane Harvey alone.
Per Artemis: “The NFIP reinsurance program is a per-occurrence arrangement, meaning it covers a single loss event.”
Also noted by Artemis at the very end of its blog post, the NFIP reinsurance layer does not have a reinstatement provision.
This means that the NFIP cannot also claim on the program for its losses from Hurricane Irma as a second and separate event.
Nevertheless, it’s a good thing that NFIP secured first event coverage. A reinsurance payment for Hurricane Harvey flood losses will be welcome.
Our Communications department has received questions from Canadian news outlets on behalf of Canadian citizens who own homes in areas affected by either Hurricane Harvey or Irma. Here are some of their questions and the answers we found. Of course, the answers below also apply to other non-citizens who own property in the U.S.
Q: Can Canadians qualify for a Federal Emergency Management Agency (FEMA) grant?
A: It depends. To be eligible for assistance from FEMA, at least one person in the household must be a U.S. citizen, Qualified Alien or noncitizen national with a U.S. Social Security number.
Q: Can Canadians purchase a FEMA National Flood Insurance Program (NFIP) policy?
A: Yes. Anyone who owns property in the U.S. can buy a FEMA NFIP policy as long as their property is in a participating NFIP community. They should be able to buy excess flood coverage if the event they want policy limits above a beyond what FEMA’s NFIP offers ($250,000 for dwelling protection, and $100,000 for the dwelling’s contents).
Q: Can Canadians purchase a policy from Florida’s Citizens Property Insurance Corp.?
A: Yes, it appears. We found no restrictions on the citizenship of the buyer. To find out more about Florida Citizens’ eligibility requirements click here.
We’ve chronicled loss estimates from Harvey. Here we’ll do the same for Irma.
As of 6 p.m. 9/13, Karen Clark estimates :
- Total insured loss of $25 billion, being
- $18 billion in the United States, mainly Florida but also Georgia, South Carolina and Alabama.
- $7 billion through the Caribbean.
Business Insurance notes:
Estimates include losses to buildings, other insured structures, contents, business interruption and autos, but do not include crops or losses covered by the National Flood Insurance Program.
As of 2:30 p.m. 9/10, RMS estimates:
- 10 percent chance that wind losses will exceed $60 billion. (This estimate has been falling the past couple of days, as the storm has tracked away from the Miami/Fort Lauderdale/Palm Beach corridor.)
- This doesn’t include:
- Post-event amplification (demand surge), which could add as much as another 15 percent, depending on how the storm plays out.
- Storm surge, which could add another 30 percent.
As of 5 p.m. 9/10, via press release:
- Total US Insured Losses: $20 billion to $40 billion.
- This estimate did not include any mention of insured losses in the Caribbean, which were estimated between $5 billion to $15 billion, according information in a prior AIR release.
- Here at I.I.I., we’ll note that a $20 billion loss would make the storm one of the three worst insured catastrophes in U.S. history, even after accounting for inflation.
As of 3 p.m. 9/9, via CNBC:
Total Insured Losses: $20 billion to $65 billion.
U.S. Insured Losses $15 billion to $50 billion