Private flood insurers needed to solve NFIP challenges long-term

Even with US Congress agreeing to a short-term extension of the National Flood Insurance Plan (NFIP) as Hurricane Helene was approaching Florida, followed now by Hurricane Milton, any long-term solution to the troubled federal program would probably need private flood insurers to take on more risk. However, according to a new AM Best report, market share growth among private flood insurers has stagnated in the face of greater opportunity.

The Best’s Market Segment Report, “Temporary Extension Protects NFIP Through Hurricane Season, Longer-Term View Is More Clouded”, published on October 7, notes that the shift of the US population to coastal areas has resulted in the large-scale construction of residential and commercial structures in these areas. 

This has expanded the exposures to potential flooding at the same time that flooding has become more intense and devastating to these areas than originally contemplated. While the NFIP’s Risk Rating 2.0 was designed to address pricing shortfalls and better determine an adequate risk charge for each specific property, the programme still carries significant debt of nearly $21 billion, and losses from Hurricane Helene will likely add to this debt, as could losses from Hurricane Milton, which is poised to strike Florida. 

“Private flood insurance may become more competitive.”

In addition, the NFIP policy count has declined, attributable partly to affordability issues around federal flood coverage under the new rating plan. At the same time, private flood insurers, which predominantly have written coverage for commercial insureds, have shown some willingness to accept flood risk, but the increase in take-up to date has been minimal.

“As pricing for NFIP increases, premiums may become more adequate relative to the risks, but private flood insurance may become more competitive, further spreading the risk,” said David Blades, associate director, Industry Research and Analytics. “Whether private insurers have the appetite for additional flood risk remains to be seen.”

According to the report, private flood insurers, which represent approximately a third of all direct premium written for flood insurance, have generated better results than writers of NFIP policies, recording a combined ratio in 2023 of 32.3 compared with 90.2 for the federal flood line. From 2020 through 2022, private insurers wrote a growing portion of the overall flood market, but that growth stalled in 2023. 

According to the report, in Florida and in other states prone to hurricanes, the share of flood insurance purchased in the private market is even lower than the national average.

“The slow growth could reflect private insurers’ unwillingness to write more due to increasingly unpredictable weather, or perhaps hesitation from insureds to switch to privately underwritten flood insurance,” said Christopher Graham, senior industry analyst, AM Best. 

“However, without the NFIP, there would be a large void in the flood insurance market—one that private flood insurers do not appear eager to fill at this point.”

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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