According to a recent AM Best report, only 30% of Florida residents have National Flood Insurance Program coverage, down from 41% when Hurricane Irma hit in 2017, while private carriers increased their total flood insurance premiums by more than 40% to surpass the $1 billion mark in 2021.
However, AM Best notes that it was still only one-third the size of the federal flood insurance market at the end of the year.
This shift, according to the rating agency, predates Hurricane Ian, an event that the US Federal Emergency Management Agency (FEMA) estimated could cause NFIP losses ranging from $3.5 billion to $5.3 billion, including loss adjustment expenses, triggering its reinsurance protection at the midpoint.
It also came after the implementation of a new NFIP rate system, which is intended to make the federally funded backstop more financially stable by charging more adequate premiums for each individual risk.
“Risk Rating 2.0,” as it is known, would also make private flood insurers more competitive in their pricing, potentially shifting related exposure to the private sector, according to Christopher Graham, senior industry analyst at AM Best.
In one way, Hurricane Katrina demonstrated the NFIP’s flood insurance rates’ inadequacy.”
Best explains that in the aftermath of Katrina, the NFIP had to borrow nearly $17 billion to cover losses from an extremely difficult hurricane season that included Hurricanes Rita and Wilma.
The total debt of the NFIP reached $36.5 billion in 2018 before Congress intervened and cancelled a $16 billion portion, resulting in the current level of $20.5 billion.
Best points out that this level of debt, combined with increasing coastal exposure, highlights the need for a solution that will entice more carriers to write private flood insurance.
California is cited by the rating agency as an example of what could happen if NFIP rates are aligned with the true actuarial risk price.
Best writes that because the risk of flood loss is lower in California—there is far less risk of storm surge in California than in any of the Atlantic or Gulf states—the true risk rate is already closer to the NFIP price, and private insurers are much more active.
In California, private flood insurance accounts for approximately 40% of all flood insurance; in Florida, private flood insurance accounts for only 15% of total flood insurance premiums.
“Because fewer areas in California are in flood zones than in Florida, private insurers may conclude that California presents more profit potential to underwrite flood coverage than Florida properties,” Graham added.