Bests Special Report: NFIP Extended but Private Markets May Provide Long-Term Flood Relief

Another stop-gap reauthorization for the National Flood Insurance
Program (NFIP), the latest through November 2018, highlights the
potential public-private partnerships hold toward securing a favorable
long-term flood insurance solution, according to a new A.M. Best
special report.

The Best’s Special Report, “NFIP Extended but Private Markets May
Provide Long-Term Flood Relief,” states that private and capital markets
are showing measured interest in accepting flood risk. The potential for
an increase in private insurance solutions for property exposed to flood
could substantially change the U.S. market. Surplus lines insurers in
particular would be ready and willing to increase their flood-risk
exposure under conditions that will allow them to underwrite and price
risk appropriately. With an increased ease of doing business, the
industry may be encouraged to participate more in the flood market and
increase consumer awareness about flood insurance.

In addition, as the capabilities to analyze flood risk increases give
the private market better insight into underwriting and pricing flood
risk, there would be more willingness by insurers to assume this risk in
a measured manner.

Government-subsidized premiums that have not adequately reflected risk
exposures, along with statutory caps on premium increases, the lack of
capital requirements or need to earn a profit and mandatory purchase
requirements have all contributed to the NFIP’s instability. In the past
two years, the Federal Emergency Management Agency has secured
reinsurance coverage in an effort to help transfer some of its risk and
better protect the taxpayers, and in 2018, FEMA secured its first
catastrophe bond, transferring risk from the NFIP to the capital markets
for additional reinsurance coverage.

Flood insurance, private and federal, is subject to severity risk, which
has only increased as coastal migration has created dense populations in
high flood-risk areas. Because of the catastrophe events of 2017, loss
ratios deteriorated sharply. Of the insurers that wrote at least $1.0
million in private flood coverage last year, nine had direct loss ratios
higher than 100%. The amount paid in NFIP losses for hurricanes Harvey,
Irma, and Maria was $9.3 billion, with $8.4 billion of that total
attributable to Harvey alone. Annual average flood losses since 1978 are
$1.4 billion, but over the last 12 years, they have risen to $3.6
billion. The densely populated coastal regions are a major concern that
will exacerbate the severity of flooding as more people and homes are
affected by natural disasters. At the same time, the number of NFIP
policies in force has more than doubled over the past 25 years.

Flood risk is incredibly complex, and the industry has yet to see
standardization in the modeling process. While A.M. Best does not
anticipate any ratings action because of slight increases to flood
exposures, any significant increase in appetite would require insurers
to provide the results of stress testing for capital adequacy, as well
as their rationale for the increased risk appetite, reinsurance and
other risk management strategies.

To access the full copy of this special report, please visit

A.M. Best is a global rating agency and information provider with a
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