FEMA’s National Flood Insurance Program (NFIP) has been underwater for years due in part to rising seas, stronger storms, and outdated flood risk maps. The NFIP covers approximately five million properties, and while premiums rose steadily over the years, by 2021, the federal program was $20 billion in debt. Deeply subsidized premiums, averaging under $800 annually, meant that the agency routinely paid out nearly four times what it received.
FEMA’s program began in 1968 when there were fewer big storms and fewer people who lived near the water. However, the coastline population in the United States increased by more than 15.3% between 2000 and 2017, reaching more than 94 million people. Furthermore, many inland areas that have experienced massive flooding lack accurate maps. According to a 2017 Department of Homeland Security inspector general assessment, 58% of FEMA flood maps were incorrect or obsolete.
FEMA Says Risk Rating 2.0 Provides More Accurate Flood Forecasting, Pricing
Until recently, FEMA relied on a relatively straightforward technique devised in the 1970s that based risk ratings on whether a residence was located in a severe flood zone and its elevation within those zones. FEMA released Risk Rating 2.0 to address the beleaguered flood program, taking into account climate change and the frequency and severity of flooding occurring beyond flood-zone areas to establish rates.
Risk Rating 2.0’s algorithm is based on significant technological breakthroughs, including sophisticated catastrophe models common in the private insurance market, and allows officials to evaluate specific properties and assess risk objectively. The new rates came into effect in October 2021 for new homes and beginning in April 2022 for renewals.
States Cry Foul over Risk Rating 2.0 Pricing
Once FEMA released its new rates, a flood of complaints came in over the spike in pricing. For example, Louisiana is projected to see a 134% hike in rates for single-family homes on average, phased in over several years, according to FEMA data, compared to an average 104% increase nationwide, with the numbers including fees and surcharges. The current average single-family home premium in Louisiana of $813 would rise to $1,904, increasing by 18% per year until it hits that target — a process that would take six years. Flood-prone areas will experience even much higher hikes.
Floridians in Boca Raton’s 33432 ZIP code can expect a 229% flood insurance premium increase, from an average of $950 per policy to $3,128. In Broward County, the 33305 ZIP code that includes Wilton Manors and Fort Lauderdale neighborhoods near the Middle River will pay 209% more, from $1,099 to $3,400.
Ten states and dozens of municipalities are suing FEMA over the flood insurance hikes. The lawsuit alleges that FEMA is not properly taking into account community flood mitigation efforts and has exceeded its authority. In addition to Louisiana, states signing on to the federal lawsuit include Florida, Idaho, Kentucky, Mississippi, Montana, North Dakota, South Carolina, Texas, and Virginia.
Private Insurers Grow Market Share in Flood Insurance
While FEMA and its NFIP continue to face obstacles with the rollout of the new rating system, private insurers have found an opening to expand their footprint in the flood insurance market. According to a report by the Insurance Information Institute (Triple-I), the U.S. flood insurance market grew 24% – from $3.29 billion in direct premiums written to $4.09 billion – between 2016 and the end of 2022, with 77 private companies writing 32.1% of the flood business across the country as of Dec. 31, 2022.
Flood insurance from the NFIP is generally less expensive than from private insurers. Premiums from insurers have been more actuarially sound, with no government subsidies offered. FEMA’s new rates allow the private insurance sector to gain greater traction in the flood market as the playing field becomes more level.
The top private insurers providing flood insurance for 2022 are AIG, Zurich, Berkshire Hathaway, Assurant, AXA SA, Swiss Re, Sompo, Liberty Mutual, Chubb, and Allstate, according to the Triple-I.
Additional Factors Could Expand Private Flood Market Further
In August, the U.S. Government Accountability Office (GAO) issued a report on the federal insurance program, examining several objectives, including the actuarial soundness of Risk Rating 2.0, how premiums are changing, efforts to address affordability for policyholders, options for addressing the debt, and implications for the private market.
Specific NFIP program regulations currently impede private-market growth, according to the GAO. Policyholders, for example, are discouraged from pursuing private flood insurance, as the law requires them to maintain continuous coverage with the NFIP to be eligible for subsidized premiums, and they do not receive reimbursements for early cancellations if they transfer to a private insurance. “By authorizing FEMA to allow private coverage to satisfy NFIP’s continuous coverage requirements and to offer risk-based partial refunds for midterm cancellations replaced by private policies, Congress could promote private-market growth and help to expand consumer options,” according to the GAO report.
Additionally, a federal advisory panel proposal is urging the government to expand the areas considered by regulators to be at high risk of flooding, which could expand the number of residents required to purchase flood insurance. Currently, the government estimates that 8.5 million properties are located in areas considered at high risk for flooding; however, according to the First Street Foundation, the number of properties at risk is 19 million.
On Dec. 21, 2022, the Department of Housing and Urban Development (HUD) began allowing homeowners with FHA-insured mortgage financing to obtain flood insurance policies that meet FHA requirements from private insurance providers. FHA requires flood insurance on insured mortgages for properties in FEMA-designated Special Flood Hazard Areas (SFHAs). Previously, FHA-insured mortgages could get flood insurance only through the NFIP, limiting consumers’ options.
“The GAO’s recommendations, HUD’s new rules, and the potential of requiring more property owners to purchase coverage will provide private insurers with additional opportunities to expand their market share,” says CEO Larry Neilson, Neilson Marketing Services and ProgramBusiness.com.
Advanced Technology, New Products, New Entrants in the Flood Market
“Advanced data and analytics capabilities and new products such as parametric flood insurance will also bring additional opportunities in the flood market for private insurers,” says Neilson.
For example, ICEYE, a provider of natural catastrophe solutions and insights, is participating in a parametric pilot program to protect low-income communities in New York City from flooding. The parametric solution, insured by Swiss Re Corporate Solutions, will fund rapid cash payments by the Center for New York City Neighborhoods (CNYCN) following a flood event. ICEYE will supply hazard data based on satellite imagery and auxiliary information sources, which determine the overall flood extent and depth at an individual building level. This information is provided by ICEYE soon after the peak flooding is captured. Swiss Re will use this data to establish whether the payment threshold of the pilot product has been met or exceeded. If triggered, CNYCN will receive an instant payment, which will fund cash grants to those affected by the flood.
Floodbase provides near-real-time flood monitoring to help insurers underwrite policies. Floodbase combines satellite imagery, water gauge data, machine learning, and other sources in a tool that tracks water levels before, during, and after floods. The data provide an empirical foundation for insurance policies that automatically pay out when policyholders experience flooding beyond a defined level.
FloodFlash offers parametric flood insurance to the general public. The insurer combines one-of-a-kind coverage with computer models, cloud software, and connected technology.
SageSure launched an admitted, proprietary residential flood program in Texas last year, with plans to expand geographically. The flood program is available through its carrier partner SURE as additional coverage on SURE home insurance policies.
With more private capital willing to finance private flood insurance, increased knowledge of flood catastrophe models, greater underwriting experience, and evolving regulations, the number of private insurers in the flood market continues to grow.
Several of our storefronts on ProgramBusiness.com offer primary and/or excess flood insurance, including DUAL, Snyder Specialty, Ryan Specialty, and Irwin Siegel Agency. The Program Business Storefront Directory connects MGAs, agents, and brokers. The platform is a one-stop-shop for industry professionals to find and collaborate with the right partners, backed by a wealth of data and insights to make informed decisions.