Severe California flood damage highlights insurance shortfall

California flooding, which has followed extreme drought, is expected to cause economic losses of $US5-7 billion ($7-9.8 billion) and has highlighted underinsurance issues in the US state, catastrophe risk modeller Moody’s RMS says.

Insured losses are likely to range from $US500 million ($703 million) to $US1.5 billion ($2.1 billion), including the National Flood Insurance Program (NFIP) and the private market, the firm estimates, with the comparatively smaller numbers reflecting the low and declining level of cover take-up.

Moody’s RMS Director Product Management Firas Saleh says extreme drought has led to soil compaction, which causes more runoff and higher risk of flooding.

“Nowhere is safe from flooding in California today,” he said. “If we’ve learned anything from this extreme rainfall and subsequent damage, it’s that even perceived low-risk flood zones are still flood zones. If it rains, it can overflow.”

The number of state households with flood insurance now stands at less than 2% and as of August only 193,281 residential NFIP policies were in place, a decline of around 5% compared to a year earlier, the firm says.

The devastation followed heavy rainfall associated with a series of extratropical cyclones starting December 26. That was exacerbated by a band of high atmospheric water vapour known as an “atmospheric river”.

The weather caused overtopped rivers, flash floods, levee breaches, mudslides, fallen trees, debris flow, and heavy snow at high altitudes, along with some wind damage. Several central California locations set three-week rainfall records and some areas received annual average rainfall totals in less than a month.

Moody’s RMS says only homeowners holding a government-backed loan who live in Special Flood Hazard Areas are mandated to obtain flood insurance, but the flood zones don’t always reflect current risk, are backward looking and infrequently revised.

Other factors affecting low take-up rates include affordability, the misconception that flood is covered under a standard homeowners’ policy and a lack of understanding of the associated incurred costs from flooding.

AM Best also says flood cover in California is disproportionately low by several measures and even homes protected by NFIP insurance may still be underinsured.

The NFIP is limited to $US250,000 ($351,530) per residence, well below California’s median home value of nearly $US685,000 ($963,192), the second-highest in the country.

“Many homes covered by the NFIP would benefit from an excess policy above the NFIP coverage limit, so opportunities abound for private flood insurers willing to take the risk,” Senior Industry Analyst Christopher Graham says.

Private flood insurance has historically been profitable for California’s top private flood writers, but the extensive damage from the latest storms may be enough to wipe out several years of good results, AM Best says.

“The current flooding in California looks to be the worst in the state’s history and will be a significant test for the state’s private flood insurance market as a whole as to capacity and underwriting standards,” it says.

AM Best also notes a regulator’s directive to insurers stating that mudslides, which are typically covered by flood insurance, are to be covered as a fire loss if the hill was previously weakened by fire. Although the total economic loss would be unaffected, the decree may shift some losses from flood policies to other property policies.