Insurance to cover ‘relatively small’ fraction of ~$7bn California flood losses

Losses from the recent California flooding are expected to reach up to $7 billion, but only a “relatively small” proportion of the damage is expected to be covered by insurance, according to the latest estimates from  Moody’s global catastrophe risk modeler RMS.

RMS anticipates total US economic losses at $5-7 billion, with insured losses ranging between $0.5-1.5 billion, including losses to the National Flood Insurance Program (NFIP) and the private flood market.

These estimates reflect inland flood impacts for the US and include damage to infrastructure. The overall economic loss estimate is based on an event reconstruction using the Moody’s RMS US Inland Flood HD Model and reflects property damage, contents, and business interruption, across residential, commercial, industrial, automobile and infrastructure assets.

RMS noted that a relatively small proportion of the economic damage is expected to be covered by insurance as the number of households in California with flood insurance stands at less than two percent – a figure it said has been “steadily declining”. As of August 2022, there were only 193,281 residential NFIP policies in place, representing a decline of around five percent as compared to 2021.

“These low flood insurance take-up rates are attributed to the fact that only homeowners holding a government-backed loan who live in Special Flood Hazard Areas (SFHAs) are mandated to obtain a flood insurance policy. But these SFHA boundary ‘flood zones’ do not always reflect the current flood risk, are backward-looking, and infrequently revised,” the report said.

“Other factors impacting flood insurance take-up rates include, but are not limited to, affordability, the misconception that flood is covered under a standard homeowners’ policy, and a lack of understanding of the associated incurred cost from flooding,” authors added.

A series of extratropical cyclones starting December 26, 2022 impacted the West Coast of the US, which resulted in heavy rainfall, overtopped rivers, flash floods, levee breaches, mudslides, fallen trees, debris flow, and heavy snow at high altitudes, together with some wind damage. he rainfall associated with these extratropical cyclones was exacerbated by a band of high atmospheric water vapor, also known as an ‘atmospheric river’.

The rainfall intensity in California was so extreme that several locations in central California set 3-week record rainfall and certain locations received their annual average rainfall totals in less than one month. This led to widespread flash floods and river overtopping. Additionally, infrastructure damage, which is accounted for within the economic loss estimates, was said to be “extensive”.

“To put this event in historical perspective with the 1862 ARkstorm, although some impacted areas are similar, the ARkstorm produced much more severe precipitation, for example, 35 inches (88.9 centimeters) of precipitation in San Francisco compared to ~ 15 inches (38 centimeters) from this event. Another important mitigating factor for this event is the presence of flood defenses, which were mostly absent in 1862,” said Mohsen Rahnama, chief risk modeling officer of Moody’s RMS.

Firas Saleh, director, product management, Moody’s RMS, concluded: “Extreme drought leads to soil compaction which means less infiltration and more runoff, hence less aquifer recharge and higher risk of flooding. Nowhere is safe from flooding in California today. If we’ve learned anything from this extreme rainfall and subsequent damage, it’s that even perceived low-risk flood zones are still flood zones. If it rains, it can overflow.”

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.