Spotlight on: Flood insurance

Overview

Flooding is the most common and costly natural disaster in the United States, causing billions in economic losses each year.  According to the National Flood Insurance Program (NFIP), 90 percent of all natural disasters in the United States involve flooding.

There is no coverage for flooding in standard homeowners or renters policies or in most commercial property insurance policies. Coverage is available in a separate policy from the National Flood Insurance Program (NFIP) and from a few private insurers. 

Recent developments

  • ​NFIP reauthorization:  Congress must periodically renew the NFIP’s statutory authority to operate. Congress must reauthorize the NFIP by no later than November 30, 2018. In the unlikely event the NFIP’s authorization lapses, claims would still be paid but the NFIP would stop selling and renewing policies (more details here.)
  • Hurricane Harvey:  Hurricane Harvey made landfall in Texas as a Category 4 storm on August 25, 2017 and then turned into the single biggest rain event in U.S. history. Harvey’s floodwaters have caused multiple deaths and billions of dollars in property damage in Texas.  Harvey made a second landfall in Louisiana on August 30th. As of January 24, 2018, $7.9 billion in closed claims have been paid out to Texas and Louisiana flood insurance policyholders, according to FEMA.
  • NFIP Reinsurance: In September 2016, the NFIP began a reinsurance program to put it in a better position to manage losses incurred from major events by transferring exposure to reinsurers.  In January 2017, FEMA expanded its September 2016 placement and transferred $1.04 billion of the NFIP’s financial risk to 25 reinsurers in a program to be in force through January 1, 2018.  The NFIP recovered the entire $1.04 billion from Hurricane Harvey’s floods. The NFIP returned to the private reinsurance market for 2018, paying $235 million for $1.46 billion coverage from a single flood event.
  • NFIP policies and premiums: The number of policies in force has been declining from the high point of 5.7 million in 2009 to 5.1 million in 2016.  The 2016 level is about the same as in 2005, the year of Hurricanes Katrina and Rita. NFIP earned premiums fell 3.0 percent to $3.33 billion in 2016 from $3.44 billion in 2015. In 2016, 59,332 claims were paid, compared with 25,798 claims in 2015 and 213,515 in 2005. The cost of claims was $3.70 billion in 2016, compared with $1.03 billion in 2015 and $17.8 billion in 2005.
  • Private flood insurance: Flood insurance had long been considered an untouchable risk by private insurers because they did not have a reliable way of measuring flood risk. In recent years insurers have become increasingly comfortable with using sophisticated models to underwrite insurance risk, and modeling firms are getting better at predicting flood risk. In 2017 private insurers reported their flood insurance premiums separately for the first time. FM Global had 54 percent of the market share (based on 2016 year-end premiums). And the top three companies held almost 81 percent of the market share.  Direct premiums written for all companies totaled $376 million.
  • Low flood insurance take-up rates: A 2016 Insurance Information Institute survey found that 12 percent of American homeowners had a flood insurance policy, down from 14 percent in 2015. A McKinsey & Co. analysis of 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 — found that as many as 80 percent of Texas, 60 percent of Florida and 99 percent of Puerto Rico homeowners lacked flood insurance. Some of the reasons cited for lack of coverage is that it is too expensive, that homeowners are not aware  they don't have it;  and that people underestimate the risk of flooding.

Background

The National Flood Insurance Program: Before Congress passed the National Flood Insurance Act in 1968, the national response to flood disasters had been to build dams, levees and other structures to hold back flood waters, a policy that may have encouraged building in flood zones.

The National Flood Insurance Act created the National Flood Insurance Program (NFIP), which was designed to stem the rising cost of taxpayer funded relief for flood victims and the increasing amount of damage caused by floods. The NFIP has three components: to provide flood insurance, floodplain management and flood hazard mapping. Federal flood insurance is only available where local governments have adopted adequate floodplain management regulations for their floodplain areas as set out by NFIP. More than 20,000 communities across the country participate in the program. NFIP coverage is also available outside of the high-hazard areas.

The law was amended in 1969 to provide coverage for mud flows and again in 1973. Until then, the purchase of flood insurance had been voluntary, with only about one million policies in force. The 1973 amendment put constraints on the use of federal funds in high-risk floodplains, a measure that was expected to lead to almost universal flood coverage in these zones. The law prohibits lenders that are federally regulated, supervised or insured by federal agencies from lending money on a property in a floodplain when a community is participating in the NFIP, unless the property is covered by flood insurance. The requirement for flood insurance also applies to buildings that receive financial assistance from federal agencies such as the Veterans Administration. However, because the initial mortgage on the property is frequently sold by the originating bank to another entity, enforcement of this law has been poor.

Legislation was enacted in 1994 to tighten enforcement. Regulators can now fine banks that consistently fail to enforce the law, and lenders can purchase flood insurance on behalf of homeowners who fail to buy it themselves, then bill them for coverage. The law includes a provision that denies federal disaster aid to people who have been flooded twice and have failed to purchase insurance after the first flood.

Buildings constructed in a floodplain after a community has met regulations must conform to elevation requirements. When repair, reconstruction or improvement to an older building equals or exceeds 50 percent of its market value, the structure must be updated to conform to current building codes. A 2007 NFIP study on the benefits of elevating buildings showed that due to significantly lower premiums, homeowners can usually recover the higher construction costs in less than five years for homes built in a “velocity” zone, where the structure is likely to be subject to wave damage, and in five to 15 years in a standard flood zone. The Federal Emergency Management Agency (FEMA) estimates that buildings constructed to NFIP standards suffer about 80 percent less damage annually that those not built in compliance.

How it works: The NFIP is administered by FEMA, part of the Department of Homeland Security. Flood insurance was initially only available through insurance agents who dealt directly with the federal program. The direct policy program has been supplemented since 1983 with a private/public cooperative arrangement, known as "Write Your Own," through which a pool of insurance companies issue policies and adjust flood claims on behalf of the federal government under their own names, charging the same premium as the direct program. Participating insurers receive an expense allowance for policies written and claims processed. The federal government retains responsibility for underwriting losses. Today, most policies are issued through the Write-Your-Own program but some non-federally backed coverage is available from the private market.

The NFIP is expected to be self-supporting in an average loss year, as reflected in past experience. In an extraordinary year, as Hurricane Katrina demonstrated, losses can greatly exceed premiums, leaving the NFIP with a huge debt to the U.S. Treasury that it is unlikely to pay back. Hurricane Katrina losses and the percentage of flood damage that was uninsured led to calls for a revamping of the entire flood program.

Flood adjusters must be trained and certified to work on NFIP claims. NFIP general adjusters typically re-examine a sample of flood settlements. Insurers that fail to meet NFIP requirements must correct problems; otherwise they can be dropped from the program.

What's in a typical policy: Flood insurance covers direct physical losses by flood and losses resulting from flood-related erosion caused by heavy or prolonged rain, coastal storm surge, snow melt, blocked storm drainage systems, levee dam failure or other similar causes. To be considered a flood, waters must cover at least two acres or affect two properties. Homes are covered for up to $250,000 on a replacement cost basis and the contents for up to $100,000 on an actual cash value basis. Replacement cost coverage pays to rebuild the structure as it was before the damage. Actual cash value is replacement cost minus the depreciation in value that occurs over time. (Excess flood insurance is available in all risk zones from some private insurers for NFIP policyholders who want additional coverage or where the homeowner’s community does not participate in the NFIP.) Coverage for the contents of basements is limited. Coverage limits for commercial property are $500,000 for the structure and another $500,000 for its contents.

To prevent people from putting off the purchase of coverage until waters are rising and flooding is inevitable, policyholders must wait 30 days before their policy takes effect. In 1993, 7,800 policies purchased at the last minute resulted in $48 million in claims against only $625,000 in premiums.

Flood Risk: As with other types of insurance, rates for flood insurance are based on the degree of risk. FEMA assesses flood risk for all the participating communities, resulting in the publication of thousands of individual flood rate maps. High-risk areas are known as Special Flood Hazard Areas or SFHAs.

Flood plain maps are redrawn periodically, removing some properties previously designated as high hazard and adding new ones. New technology enables flood mitigation programs to more accurately pinpoint areas vulnerable to flooding. As development in and around flood plains increases, run off patterns can change, causing flooding in areas that were formerly not considered high risk and vice versa.

People tend to underestimate the risk of flooding. The highest-risk areas (Zone A) have an annual flood risk of 1 percent and a 26 percent chance of flooding over the lifetime of a 30-year mortgage, compared with a 9 percent risk of fire over the same period. In addition, people who live in areas adjacent to high-risk zones may still be exposed to floods on occasion. Since the inception of the federal program, some 25 to 30 percent of all paid losses were for damage in areas not officially designated at the time of loss as SFHAs. NFIP coverage is available outside high-risk zones at a lower premium.

National Flood Insurance Reform

 

In 2012 the Biggert-Waters Flood Insurance Reform Act was passed in an attempt to make the federal flood insurance program more financially self-sufficient by eliminating rate subsidies that many property owners in high-risk areas receive.

But in March 2014 Congress rescinded many of the rate increases called for by the Biggert-Waters Act. The new law reduced some rate increases already implemented, prevented some future increases and put a surcharge on all policyholders. The measure also authorized funds for the National Academy of Sciences to complete an affordability study.

The 2014 law prevents any policyholder from seeing an annual rate increase exceeding 18 percent. It calls on the flood program’s administrator, the Federal Emergency Management Agency (FEMA), to “strive” to prevent coverage from costing more than 1 percent of the amount covered. In other words, if the policy offered $100,000 of coverage, the premium would not exceed $1,000.

The 18 percent cap will result in refunds in some cases. Refunds began in October 2014. FEMA has a fact sheet on who is eligible for refunds.

The law also reinstates a practice known as grandfathering, meaning that properties re-categorized as being at a higher risk of flooding under FEMA’s revised maps would not be subject to large increases.

It also ends a provision in Biggert-Waters that removed a subsidy once a home was sold. People who purchased homes after Biggert-Waters became law will receive a refund. Many lawmakers in coastal states were concerned that the higher cost of flood insurance would have a negative impact on the real estate industry. The subsidy will now be covered by a $25 surcharge on homeowners flood policies and a $250 surcharge on insurance for nonresidential properties and secondary (vacation) homes.

According to data from FEMA, most current flood insurance policyholders (81 percent, or 4.5 million) pay rates based on the true risk of flood damage and so were not affected by Biggert-Waters or the subsequent rollback. Properties most affected by the rate hikes were in high-risk flood zones; were built before communities adopted their first Flood Insurance Rate Map; were second homes; or are second homes that have not been elevated. Others affected include businesses and those who live in homes that have been repeatedly flooded.

In June 2014 Florida enacted a law that encourages private companies to offer flood insurance. The legislation permits four types of flood coverage – a standard policy, which resembles National Flood Insurance Program coverage, and three enhanced policies. To encourage market growth, the law allows insurers to file their own rates until October 1, 2019. After that, rates will be subject to regulatory approval.

Flood Resilience

Disaster resilience refers to the ability of communities to prepare for, recover from, and adapt to adverse events.

Some of the best practices for community flood resilience recommended by the Environmental Protection Agency include: a comprehensive disaster recovery plan; green infrastructure techniques; land conservation in river corridors; restoring wetland vegetation; discouraging development in frequent flood areas; adapting flood resistant building codes; and coordinating with neighboring jurisdictions to implement a watershed-wide approach to storm-water management.

Urban planners and engineers around the world are developing innovative flood solutions such as amphibious housing, porous roads and sidewalks, and use of satellite data for more frequent flood alarms.

A 2017 National Institute of Building Sciences study found that for every dollar invested in riverine flood mitigation the return was $7 in cost savings.

Flood coverage in other countries

The system in the United States is unique in that for the most part the government underwrites the coverage and private insurers act as administrators bearing no actual flood risk.

In other developed countries, there are two basic methods of providing flood insurance. Under the first, the optional system, insurers extend their standard policy to include supplemental coverage for flood damage on payment of additional premium. The coverage tends to be expensive because only those most likely to be flooded, and therefore to file claims, purchase it, a situation known in the insurance industry as adverse selection. Among the countries with optional coverage are Germany and Italy.

The other method is “bundling.” Under this system, flood coverage is combined with coverage for other perils such as fire and windstorm, thus spreading the risk of flood losses across a large geographical area and greatly increasing the percentage of the population covered for flood damage. Countries that have adopted this method include the United Kingdom, Spain and Japan. In addition, in some countries such as France and Spain there are government compensation programs for major disasters, including flooding, that take effect when the cost of a disaster reaches a certain level.

In 2014 the United Kingdom launched Flood Re, a not-for-profit reinsurance organization to take on flood risks that primary insurers do not want. If an insurer calculates that the flood risk of a particular policy exceeds the flood premium, it will cede that risk to Flood Re. The insurer will pay the claim, then seek reimbursement from Flood Re. In all likelihood, Flood Re’s losses and expenses will exceed its premium. Additional funding will come from a levy raised from insurers by market share.

Charts and graphs

National Flood Insurance Program, 1980-2017

    Losses paid  
Year Policies in force
at year-end
Number Amount ($000) Average paid flood claim
1980 2,103,851 41,918 $230,414 $5,497
1985 2,016,785 38,676 368,239 9,521
1990 2,477,861 14,766 167,897 11,371
1995 3,476,829 62,441 1,295,578 20,749
2000 4,369,087 16,362 251,721 15,384
2005 4,962,011 213,593 17,770,443 83,198
2009 5,700,235 31,034 779,974 25,133
2010 5,645,436 29,164 773,706 26,529
2011 5,646,144 78,236 2,429,440 31,053
2012 5,620,017 151,849 9,516,995 62,674
2013 5,568,642 18,118 492,542 27,185
2014 5,406,725 12,907 380,222 29,459
2015 5,205,094 25,798 1,028,338 39,861
2016 5,081,470 59,332 3,693,244 62,247
2017 (1) 95,235 8,736,386 91,735

(1) Data not yet available.

Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.

View Archived Tables

  • As of June 30, 2018, there were over 75,000 paid losses from Hurricane Harvey and the average paid loss was $115,104.  This compares with Hurricane Katrina which had 167,000 paid losses, at an average of $97,500 per loss.
  • In 2016 the average amount of flood coverage was $246,890, and the average premium was $656.
  • The average flood claim in 2017, the year of Hurricanes Harvey, Irma and Maria, was $91,735, up from $62,247 in 2016.
  • NFIP earned premiums fell 3.0 percent to $3.33 billion in 2016 from $3.44 billion in 2015.

Top 10 Most Significant Flood Events By National Flood Insurance Program Payouts (1)

 

Rank Date Event Location Number of
paid losses
Amount paid
($ millions)
Average
paid loss
1 Aug. 2005 Hurricane Katrina AL, FL, GA, LA, MS, TN 166,790 $16,258 $97,475
2 Oct. 2012 Superstorm Sandy CT, DC, DE, MA, MD, ME, NC, NH,
NJ, NY, OH, PA, RI, VA, VT, WV
132,036 8,749 66,266
3 Aug. 2017 Hurricane Harvey AL, AR, FL, GA, KY, LA, MS, NC, TX 75,749 8,719 115,104
4 Sep. 2008 Hurricane Ike AR, IL, IN, KY, LA, MO, OH, PA, TX 46,683 2,700 57,837
5 Aug. 2016 Louisiana severe storms
and flooding
LA  26,911 2,454 91,200
6 Sep. 2004 Hurricane Ivan AL, DE, FL, GA, LA, MD, MS, NJ, NY,
NC, OH, PA, TN, VA, WV
28,153 1,607 57,098
7 Aug. 2011 Hurricane Irene CT, DC, DE, MA, MD, ME, NC, NH,
NJ, NY, PA, RI, VA, VT
44,307 1,346 30,368
8 Jun. 2001 Tropical Storm Allison FL, LA, MS, NJ, PA, TX 30,671 1,105 36,028
9 Sep. 2017 Hurricane Irma FL, GA, SC 21,749 1,022 46,989
10 Oct. 2016 Hurricane Matthew FL, GA, NC, SC, VA 16,542 649 39,217

(1) Includes events from 1978 to February 28, 2018, as of April 30, 2018. Defined by the National Flood Insurance Program as an event that produces at least 1,500 paid losses. Stated in dollars when occurred.

Source: U.S. Department of Homeland Security, Federal Emergency Management Agency; U.S. Department of Commerce, National Oceanic and Atmospheric Administration, National Hurricane Center.

View Archived Tables

Top 10 Writers of Private Flood Insurance By Direct Premiums Written, 2017 (1)

($000)

Rank Group/company Direct premiums written (2) Market share (3)
1 FM Global $237,334 40.3%
2 Assurant Inc. 89,901 15.3
3 Zurich Insurance Group 62,749 10.7
4 American International Group (AIG) 58,233 9.9
5 Swiss Re AG 26,336 4.5
6 Berkshire Hathaway Inc. 17,120 2.9
7 Liberty Mutual 15,460 2.6
8 Alleghany Corp. 13,197 2.2
9 MAPFRE SA 13,103 2.2
10 Allianz 11,705 2.0
  Total, all insurers $589,147 100.0%

(1) Private flood includes both commercial and private residential coverage, primarily first-dollar standalone policies that cover the flood peril and excess flood. Excludes sewer/water backup and the crop flood peril.
(2) Before reinsurance transactions.
(3) Based on U.S. total, includes territories.

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

View Archived Tables

Additional resources

Federal Emergency Management Agency,"Homeowner Flood Insurance Affordability Act: Overview," March 2014

Center for Insurance Policy and Research, National Association of Insurance Commissioners."Homeowner Flood Insurance Affordability Act of 2014: Section by Section Summary," March 2014

United States Government Accounting Office, "Flood Insurance. Comprehensive Reform Could Improve Solvency and Enhance Resilience," April 2017

American Academy of Actuaries, "The National Flood Insurance Program: Challenges and Solutions," April 2017

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED 

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