Facts + Statistics: Flood insurance

 

National Flood Insurance Program

The chart below shows the 10 most significant floods based on National Flood Insurance Program (NFIP) payouts from 1978 to January 31, 2019 (latest data available). Hurricane Katrina in 2005 was the worst U.S flood event based on the amount paid to NFIP policyholders, $16.2 billion, paid to 167,000 policyholders. Hurricane Harvey in 2017 ranks as the second most significant U.S. flood event, with $8.9 billion paid to more than 76,000 NFIP policyholders. Superstorm Sandy ranked third with $8.8 billion paid to more than 132,000 policyholders.

 

Private flood insurance

The National Flood Insurance Program, now 50 years old, compensated for coverage not available in the private market. Private insurers did not have reliable ways of measuring flood risk but technological advances now allow insurers to underwrite risk more accurately and make sounder actuarial decisions. In 2019 federal regulators allowed mortgage lenders to accept private homeowners flood insurance if the policies abide by regulatory definitions. Also allowed are private insurance policies that do not meet regulations if insurers provide adequate protection according to general safety and soundness requirements. The effect is likely to impact homeowners in states where most of the nation’s flood insurance policies are held.

In 2019 net premiums written for private flood insurance totaled $287.2 million, down 46.9 percent from $540.9 million in 2018, according to NAIC data compiled by S&P Global Market Intelligence. 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 totaled $307.9 million. On the restated basis, net premiums written for 2019, at $287.2 million, were down at the much lower rate of 6.7 percent. Direct premiums written (which are before reinsurance transactions) for private flood insurance totaled $522.6 million in 2019, up 45 percent from $360.1 million in 2018, excluding FM Global’s 2018 private flood premiums. There were 41 private companies writing flood insurance in 2019, compared with 32 in 2018. The number of companies also excludes FM Global.

AM Best says the increase in private carriers improves competition and helps spread the economic risk that comes from flooding. Private carriers can also offer higher coverage than FEMA’s National Flood Insurance Program policies, currently capped at $250,000 for residential buildings and $500,000 for non-residential buildings.

Despite technological advances that enable private insurers to accurately underwrite flood risk, a sub­stantial flood protection gap remains, according to an April 2021 paper published by the Triple-I. Flood: Beyond Risk Transfer notes that a growing number of experts consider the existing approach to flood risk to be insufficient and unsustainable. In the United States, experts have charted rising loss trends, much of which is due to people moving into risk-prone areas, resulting in more costly damage when extreme weather events occur. Another factor is intensifying rainfall fueled by climate change over the past 30 years. Despite these dangers, on average, in the United States only 30 percent of homes in the highest-risk areas have flood coverage, according to the Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania. The report recommends educating homeowners to purchase flood insurance when they buy homeowners insurance, but acknowledges that more must be done to close the protection gap. The insurance industry can help by working with governments to promote improve­ments in zoning, land use, and building codes. Some new approaches would be to increase the use of parametric insurance, which covers risks without sending adjusters to assess damage after an event and pays out if certain agreed-upon conditions are met, or microinsurance, which could provide low-cost insurance to individuals generally not covered by traditional insur­ance or government programs.

 

Coastal State Storm Surge And Hurricane Wind Risk

Storm surge is ocean water that is pushed ahead of a storm. Storm surge can penetrate well inland from the coastline and cause severe damage. States along the U.S. Gulf of Mexico and Atlantic Basin are potentially vulnerable to storm surge damage. A 2021 CoreLogic report shows that in 2021, there were nearly 8 million coastal homes along the Gulf and Atlantic Coasts, representing more than $1.9 trillion in reconstruction costs, at risk for storm surge damage. The reconstruction cost is based on the 100 percent destruction of the residential structure, using a combined cost of construction materials, equipment and labor costs, calculated by geographic location.  The study also found that more than 31 million homes along the Gulf and Atlantic Coasts were at a moderate or greater risk from being damaged by hurricane winds. The reconstruction costs of those vulnerable homes was about $8.5 trillion. These enormous reconstruction costs stress the importance of understanding the risk of hurricane damage and protecting homes and other property. Moreover, climate change affects hurricane risk from sea-level rise, increased rainfall, increasing frequency of hurricanes and the intensity of hurricanes.

The data shown in the following charts are cumulative. For storm surge risk, a home potentially affected by a Category 1 storm would also be affected by Category 2 to 5 storms. Thus, Category 5 represents the aggregate total risk from Category 1 to 5 storms. For hurricane wind risk, a home at moderate or greater risk would encompass all wind risks from moderate to extreme.

The Insurance Institute for Business and Home Safety (IBHS) “Rating the States” report ranks the 18 Atlantic and Gulf states vulnerable to catastrophic hurricanes by comparing the quality of state building codes, state enforcement and contractor licensing. Building codes are critical to disaster mitigation, as well as to enabling families, communities, and businesses to bounce back from natural and man-made catastrophes. According to the National Institute of Building Sciences, adopting model codes saves $11 for every $1 spent.

Florida ranked first by the IBHS for building codes, enforcement and contractor licensing, with a score of 95 in 2021 which has been consistent over the past four years. Virginia ranks second with 94, followed by South Carolina (92), New Jersey (90) and Connecticut (89). The three bottom states were Delaware (17), Mississippi (29) and Alabama (30).