Flooding from Florence could trigger NFIP’s protection – again

Hurricane Florence could trigger the risk transfer mechanisms put in place by the National Flood Insurance Program (NFIP) – for the second year in a row.

The threat of extreme flooding has implications for the National Flood Insurance Program (NFIP), private market flood insurers, personal and commercial automobile writers, traditional reinsurers, and Insurance Linked Securities (ILS) markets, according to Fitch.

The potential for extensive flood and storm surge related damage related to Florence has drawn early comparisons with Hurricane Harvey, which produced a historic level of rainfall along the Texas coast in August 2017, leading to massive flooding and significant losses that were borne by the NFIP or were ultimately uninsured.

Fitch noted that Florence could have a meaningful impact on the commercial property and business interruption markets in the region but the extent of losses would increase significantly if the storm tracks through a major metropolitan area as Harvey did in Houston.

According to an analysis by catastrophe modeler CoreLogic, North Carolina, South Carolina, Georgia and Virginia are each among the top-ten states exposed to hurricane driven storm surge, ranked by total reconstruction cost. Insured losses related to storm surge and rainfall in the residential property market will largely fall to NFIP, which had a combined 532,489 policies in force in NC, SC, GA and VA as of August 2018.

The NFIP has added considerable risk transfer mechanisms to its structure in the last 18 months, which has helped the organization shift a portion of its risk to traditional reinsurers as well as to the capital markets. The NFIP recovered its entire $1.042 billion layer of coverage in 2017, largely as a result of losses from Harvey.

Subsequently, the NFIP was able to secure coverage of $1.46 billion from a panel of 28 private reinsurance markets for qualifying flood losses in 2018. In addition, the NFIP entered the ILS market and sponsored its first catastrophe bond in August 2018, providing the organization with $500 million of collateralized limit and diversifying its risk transfer partners, sharing flood risk with capital market investors.

All participants in these risk transfer programmes will now be watching the path of Florence with close interest.

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