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NEW YORK, April 29, 2021—Major flood events could grow over the next 30 years even as U.S. insurers and public policymakers improve their ability to reduce flood risks, according to the Insurance Information Institute’s (Triple-I) just-released paper, Flood: Beyond Risk Transfer.
“Our understanding of loss trends and expertise in assessing and quantifying risk must be joined at the hip to technology, public policy and finance, and science,” stated Sean Kevelighan, CEO, Triple-I. “We need to partner with communities and businesses at every level to promote a broad resilience mindset focused on pre-emptive mitigation and rapid recovery.”
The increasing frequency and severity of U.S. flood events have serious implications for property values, insurance rates, and mortgage-backed securities, according to the Triple-I’s paper. Despite government efforts, the existing approach to flood risk is insufficient, the paper adds.
FEMA’s National Flood Insurance Program (NFIP), the largest writer of flood insurance in the U.S., owes more than $20.5 billion to the U.S. Treasury, leaving the NFIP with $9.9 billion in borrowing authority. Congress has set the NFIP’s debt limit at $30.4 billion. The $20.5 billion debt is serviced through premiums paid by the nation’s five million-plus NFIP policyholders.
Flood: Beyond Risk Transfer includes information on flood loss trends and what drives them, and how improved data and analytical tools are helping communities and policymakers. Moreover, the paper also examines how insurers and reinsurers are expanding flood insurance coverage.
“Whether it’s building codes or pre-emptive risk mitigation, it costs money,” said Dr. Michel Léonard, CBE, Vice President and Senior Economist, Triple-I. “The better the data at your disposal, the more accurately you can justify the expense.”
Flood was long considered an untouchable risk for private insurers. This led to the NFIP’s creation by the federal government in 1968. Yet the 21st century’s improved data analytics and sophisticated catastrophe modeling have allowed private insurers to become more comfortable writing flood policies. Indeed, new flood insurance products have proliferated, and this should improve the availability and affordability of this coverage, according to the Triple-I’s latest paper.
New insurance products alone, however, will not close the protection gap. Risk transfer is only part of the solution to manage the impact of flooding. Some of the most interesting innovations now focus on preventing and mitigating flood damage to property.
To illustrate this point, the Triple-I’s paper cites reinsurers who have entered into agreements with insurers and managing general agents (MGAs) to allow property owners to bundle flood insurance coverage into their homeowners policy via endorsements. The increase in the number of private insurers improves competition and helps spread the economic risks of flooding. Private insurers also offer higher policy limits than NFIP policies, which are currently capped at $250,000 for residential buildings and $500,000 for nonresidential buildings.
The insurance industry can play a wider role in reducing risk by working with governments to promote improvements in zoning, land use, and building codes, the Triple-I’s paper notes. Better data is also essential for improved decision-making and discovering new opportunities, it concludes.