Recent Hurricanes Increase Debt, Questioning NFIP’s Long-Term Viability – AM Best | Insurance Business America’s Catastrophes and Floods Recent Hurricanes Increase Debt, Questioning NFIP’s Long-Term Viability Questioned – AM Best
Sustainability of the program remains questionable
Catastrophe and flood
Written by Kenneth Arauro
Questions remain about the long-term sustainability of the National Flood Insurance Program (NFIP), even though Congress recently agreed to a short-term extension as Hurricane Milton nears landfall and in the wake of Hurricane Helen are.
A permanent solution to the troubled federal program may require private insurers to take on more flood risk, but growth in private flood insurance is It’s slowing down.
The report highlights how the migration of populations to coastal areas is increasing the exposure of residential and commercial properties to flooding. This further exacerbated the challenges facing the NFIP, which has accumulated nearly $21 billion in debt.
Losses from Hurricane Helen are expected to add to this debt, and additional losses from Hurricane Milton could further exacerbate the program’s financial burden.
Although NFIP has introduced the Risk Assessment 2.0 system to improve pricing and better assess the risk of individual properties, affordability issues remain. The number of NFIP policies has declined, in part because of the higher cost of federal flood coverage under the new program.
Private insurers have historically focused on commercial policy and have expressed interest in taking on more flood risks, but so far their efforts have been minimal.
David Blades, associate director of industry research and analysis at AM Best, noted that as NFIP prices rise, private insurers could become more competitive in the flood insurance market.
“It remains to be seen whether private insurers have the appetite for additional flood risk,” Blaise said.
Private flood insurance companies, which account for about one-third of all direct premiums paid for flood insurance, have better financial performance than NFIP policyholders, according to the report.
In 2023, private insurers reported a composite ratio of 32.3, compared to 90.2 for the NFIP. Nevertheless, private market growth stalled in 2023 after years of expansion from 2020 to 2022. In hurricane-prone states such as Florida, the proportion of flood insurance purchased on the private market remains below the national average.
Christopher Graham, senior industry analyst at AM Best, said the slow growth in private flood insurance is due to insurers being reluctant to increase claims due to unpredictable weather, and policyholder He suggested that this may be due to reluctance to switch to private insurance.
“But without the NFIP, there would be a huge void in the flood insurance market. At this point, private flood insurance companies don’t seem keen on filling it,” Graham said.
NFIP debt
NFIP’s current liability is largely due to its inability to fully cover claims from major disasters such as Hurricane Katrina, Superstorm Sandy, and Hurricane Harvey. Even though Congress forgave $16 billion in NFIP debt in 2018, the program still owes the U.S. Treasury $20.6 billion. Since 2005, losses have exceeded premiums by $36 billion.
The increase in flood damage is partly due to the construction boom in coastal areas. While the NFIP’s original pricing model may have been appropriate at the time, the expansion of coastal residential and commercial developments has increased vulnerability to flooding.
Urbanization has also reduced the amount of land available to absorb floodwaters, causing flooding to be more severe than initially expected.
After Hurricane Helen, Homeland Security Secretary Alejandro Mayorkas noted that FEMA, which oversees the NFIP, may not have enough funds to cover the remainder of the hurricane season.
The program’s debt is expected to rise further as it faces additional claims related to storm surge in Florida and inland flooding in states such as Georgia, North Carolina and Tennessee.
Losses from Hurricane Milton could further increase NFIP’s financial challenges and continue to strain the federal program’s ability to respond to claims and maintain financial stability.
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