The landfall of back-to-back hurricanes in less than two weeks has put flood insurance in a new light, if not the center stage, for many inside and outside the insurance industry.
Images of flood and storm damage in North Carolina and Florida show that even standard homeowners insurance and commercial property insurance may not provide a quick path to economic recovery from life-threatening torrential rains. An amazing reminder that there is.
This type of coverage has traditionally been available through the National Flood Insurance Program (NFIP), which began in 1968 as a way to protect property owners from flood damage. The government program was financially sustainable until Hurricane Katrina in 2005. Since then, NFIP has incurred significant debt due to tropical systems such as Hurricane Sandy.
Despite Congress canceling $16 billion of the program’s debt in 2018, the NFIP is $20.5 billion in the red ahead of this year’s hurricane season. This situation will be further exacerbated by an active hurricane season in 2024.
NFIP introduced Risk Rating 2.0 as a way to recalibrate and correct the program’s pricing shortfalls, taking into account each property’s actual flood risk level and attempting to determine the appropriate risk burden for each specific property. . The goal was for rates to reflect up-to-date information on distance to the nearest flood source, risk of flooding from rainfall, and actual costs of replacement or reconstruction.
The new rate plans went into effect in October 2022 for new policies and April 2023 for renewals. The number of NFIP policies has declined since 2019, but the decline has accelerated over the past two years. This is also due in part to affordability issues regarding pricing of federal flood coverage under the new rating plan. The maximum increase in renewal premiums is 18% per year, but the initial price increase is too much for some policyholders.
The move towards private flood insurance by policyholders has been significant, with some insurers increasingly interested in creating their own private flood coverage. 2022 saw an initial strong rise, as the private market recorded $1.3 billion of the flood market’s direct premium income, most of it from commercial real estate, increasing 24.6% from 2021.
Private sector revenues in 2023 were relatively flat at $1.4 billion. It remains to be seen what that level will be in 2024 due to the impact of continued increases in NFIP policy prices. It can take up to five years for NFIP premiums based on a 2.0 risk rating to reach actuarially reasonable rates for all insureds. Similarly, the impact of pricing on competition takes time for its effects to fully penetrate the market. This will also largely depend on the flood risk appetite of the private insurance market.
Hurricanes are the leading cause of catastrophic flooding, making Florida the largest overall flood insurance market in the United States, accounting for more than 30% of total flood insurance premiums and more than double that of any other state. Masu. However, in Florida and other hurricane-prone states, the proportion of flood insurance purchased on the private market is lower than the national average.
First-half results (primarily before the Atlantic hurricane season, which begins June 1 and ends November 30) have traditionally shown that the NFIP can cover the types of flooding envisioned at the program’s inception. However, in the first half of 2023, major floods occurred in California and Florida, each causing more than $1 billion in damage. The federal flood loss rate was above 70.0 in the first half of 2023, but remained below 50.0 in 2022 and 2024, which were relatively quiet years of catastrophes. This highlights the event-driven nature of flood losses. The second half of 2024 will become more evident, with challenges to overall profitability likely to put pressure on the NFIP’s capital resources, including available capital, reinsurance, capital market commitments, and borrowing authority. .
A spending resolution approved by Congress in late September would extend the NFIP until December 20, 2024. Given the program’s debt, the resolution is likely to be discussed again as each budget negotiation draws to a close. However, without the NFIP, there would be a large void in the flood insurance market, and private flood insurance companies do not seem keen to completely fill this void at this time.
Despite the federal government’s recent reauthorization of a short-term extension of the NFIP, it is becoming clear that without a long-term solution to stabilize the federal program, debt levels will only rise further. . In the absence of clear, long-term solutions to the NFIP and growing climate risks, a more viable role for private flood insurers is also difficult.
Photo: A man walks near a flooded area near the Swannanoa River due to Hurricane Helen on Friday, September 27, 2024 in Asheville, North Carolina. (AP Photo/Eric Verduzco, File)
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