SPECIAL: US insurers must be wary of diving into $3.3bn NFIP flood placement

The US National Flood Insurance Program (NFIP) is up for renewal in 2017 and is expected to offer an opportunity for the private sector to get involved. But large losses on the programme mean private insurers participating need to carefully analyse the risks, according to industry experts.

“It looks like there is going to be a major push to the private market where possible,” said Howard Botts, vice president of information intelligence provider CoreLogic.

The NFIP is, for the first time, talking about placing its $3.3 billion in premium flood programme in the private sector, he said. “There will be tremendous discussion in the US over public/private kind of insurance,” he told Intelligent Insurer.

In the US, flood insurance is mandatory for everyone with a home mortgage within a 100-year flood zone. But the US National Flood Insurance Program is around $23 billion in arrears because, Botts said, flood models are not built to current actuarial risk standards. “A lot of the very high risk locations have below market, subsidized rates,” he said.

Rates for flood insurance are artificially low. A home owner paying $500 a year for flood insurance might face a bill of closer to $5,000 per year based on a true actuarial rate, Botts said.

Those tend to be homes that are at the bottom of a 100-year flood zone and may flood repeatedly so the federal government is paying to have those replaced. If you are thinking about the private market, it would be very irrational to insure something like this unless the insurer gets a fair rate of return, he explained.

The southern US state of Louisiana has been hit by extensive flooding in August 2016 which is expected to reach insurable losses of between the range of $8.5 billion and $11 billion, according to catastrophe modelling firm AIR Worldwide.

More than 145,000 residences – housing upwards of 359,000 people – were in the flood-affected areas, and more than 12,000 businesses were also identified as affected, according to a report from the Baton Rouge Area Chamber.

But many of the affected properties are in areas classified as 1,500 year or 1,000 year floods and very few people have flood insurance outside the 100-year flood zone, Botts noted.

He expects the NFIP renewal to introduce more mandatory purchase requirements, maybe up to the 500-year flood level, while the federal government retains the worst risk but includes incentives to the private market to write flood insurance.

“It’s both an opportunity and a problem for insurers,” Botts explained. Flood risk assessment needs a very granular risk model built on very high resolution data like 10-meter accuracy or less. Two buildings can be adjacent to each other, but have completely different risk based on their ground floor elevation.

“Two or three feet elevation difference can be significant,” he noted. Flood risk assessments need much more micro level data than for example hurricanes and earthquakes, he said.