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 many private insurers.
NFIP risk rating reform: On April 1, 2021, FEMA announced it will implement a new rating methodology designed to provide actuarially sound rates that are equitable and easy to understand. According to FEMA more than 200,000 policies will have a significant increase in premiums, while about 1.15 million policies will have a decrease. The new rates went into effect on October 1, 2021 for new policies and will go into effect on all remaining policies renewing on or after April 1, 2022. A Triple-I Blog post explains how the new rating methodology will make the system fairer.
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 But in March 2014, Congress rescinded many of the rate increases called for by the act.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 prevented any policyholder from seeing an annual rate increase exceeding 18 percent. It called on the flood program’s administrator, 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.
The law also reinstates a practice known as grandfathering, meaning 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 hurt 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 vacation homes.
According to FEMA, most current flood insurance policyholders at that time (81 percent, or 4.5 million) paid 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 people living in homes that have been repeatedly flooded.
According to NAIC data compiled by S&P Global Market Intelligence, in 2020 net premiums written for private flood insurance totaled $302.4 million, up 5.3 percent from $287.2 million in 2019 but below premiums in 2018, when they reached $540.9 million. Premiums in 2019 were impacted by the largest writer of private flood insurance, FM Global, reclassifying private flood insurance into allied lines. When 2018 net premiums written are restated to exclude premiums from FM Global, they total $307.9 million. Restated net premiums written for 2020 are $302.4 million and are approximately at the same level as they were in 2018. Direct premiums written (premiums before reinsurance transactions) for private flood insurance totaled $735.1 million in 2020, up 40 percent from $522.6 million in 2019. In 2020, 58 private companies were writing flood insurance, compared with 41 in 2019.
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.
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.
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