As Catastrophic Storm Costs Rise, Could Mandatory Flood Insurance Help?

This post is part of a series sponsored by AgentSync.

Key Takeaways:

The rising cost to U.S. taxpayers of more frequent and severe flood damages
The problems with the current state of flood insurance in the U.S.
Actual and proposed flood insurance reforms
Opportunities for private insurers in the future of flood insurance

The price of flood damage from massive hurricanes, wildfires, and overflowing riverbanks continue to pile higher, yet most U.S. homeowners aren’t protected by any type of flood insurance policy. Very few properties are required by law to maintain flood insurance, and those that have a higher likelihood to use the coverage at some point over the span of the property’s lifetime.

Even though mandatory purchase requirements include mandatory loss prevention and risk mitigation efforts, about 3.8 percent of insured policyholders located within the special flood hazard area have filed repeat flood insurance claims between 1978 and 2015. This tiny fraction of properties has received over 40 percent of total flood loss claims payouts, which theoretically could have been prevented by a combination of more resiliently built properties and fewer properties located in the highest-risk areas to begin with.

All of this loss, including repeat losses, doesn’t bode well for the solvency of the National Flood Insurance Program (NFIP). It opens up questions about the need for a greater level of mandated flood insurance coverage and could be an opportunity for private insurance carriers to step up and fill an enormous coverage gap.

For this blog, we conducted research and spoke directly with a FEMA spokesperson, to bring you in-depth coverage of the true cost of flood insurance, uninsured losses, the coverage gap, and how government and private insurers may find a path forward.

The increasing cost of catastrophic flood losses

According to a Jan. 9 news release from the Federal Emergency Management Association (FEMA), federal support for recovery from Hurricane Ian has already exceeded $4.5 billion. The agency predicts the total amount of National Flood Insurance Program (NFIP) claims payouts could total between $3.5 and $5.3 billion, when all’s said and done. It seems like Hurricane Ian’s destruction becomes more expensive by the day and only time will tell the true cost – with much of that cost shouldered by the federal government.

Although tragic, this level of destruction isn’t surprising. We’ve previously covered how climate change is contributing to the rise of catastrophic events (and insurance losses), even ones that defied all expectations. Across the entire insurance industry, insurers have to face the reality of climate change’s impact. Year after year, we see more frequent and more severe losses, whether they’re caused by fires, flooding, hurricanes, or other disasters.

Looking for proof? According to information from III, the 10 costliest NFIP claims payouts between 1978 and 2021 all took place since 2004. The III’s data hasn’t been adjusted for inflation, but if you’re wondering how a storm like 1992’s Hurricane Andrew would impact us today, Global Reinsurer Swiss Re calculates its damage at $120 billion due both to inflation and the larger number of people and buildings within the storm’s path now compared to 30 years ago.

Keep in mind, these recorded costs are only based on what the NFIP pays out in claims. They don’t include uninsured losses paid by individual home and business owners, or claims paid by private flood insurers. So, as expensive as our worst floods have been, the true, total cost is likely incalculable.

The cost of uninsured flood losses

Paying out claims to NFIP policyholders isn’t the only big expense FEMA deals with when it comes to catastrophic flood damage. With such a small percentage of U.S. households insured through the NFIP and private sources of flood insurance, many disaster-stricken Americans rely on FEMA’s Individuals and Households Program (IHP) to provide basic and necessary help during disaster recovery.

FEMA’s website states, “IHP assistance is not a substitute for insurance and cannot compensate for all losses caused by a disaster.” However, this federal program may repair and rebuild primary residences, replace personal property and vehicles, and provide temporary housing to eligible individuals and families impacted by natural disasters who are either uninsured or underinsured.

We should note that as of fiscal year 2023, IHP assistance is capped at $41,000 for housing assistance and $41,000 for other, non-housing needs, per household (regardless of how many people), in a given emergency situation. This total ($82,000 if a household qualifies for the maximum) is far less than the benefits provided under an NFIP insurance policy and may only cover a fraction of losses. Though caps are adjusted annually based on the consumer price index (CPI), the maximum benefits are still much lower than what households can purchase in NFIP flood insurance.

And how much does that cost? A FEMA spokesperson told AgentSync that, on average, during each year between 2019 and 2021, the agency paid out over $268 million per year to help with flood damages. They also said FEMA’s Public Assistance Program “provides supplemental grants to state, tribal, territorial and local governments, and certain types of non-profits” – totaling (on average) over $279 million per year for flood damages between 2019 and 2021.

All of these costs are on top of paying claims for covered NFIP policyholders (and, in case you were wondering, that was over $1.16 billion in fiscal year 2022). Meaning, in addition to any money the NFIP has to borrow to pay for covered claims, it also relies on taxpayer money to help with uninsured and underinsured disaster recovery.

Why do people keep moving into high-risk flood zones?

Simply put, there just aren’t enough regulations that discourage people from moving to (and developers from building in) the highest-risk flood zones. Very few cities have implemented stringent preventive requirements for new development in these risky areas, although Nashville and Milwaukee are two standout examples of cities that have gone in that direction.

Across the U.S., population growth has actually been slightly higher in FEMA-designated 100-year floodplains than in less risky areas. And this trend holds true globally. Whether it’s due to an appealing climate, a desire to live near the water, or a political preference, Texas and Florida, for example, have seen the largest levels of population growth in recent years. This is despite the fact that these states contain many of the nation’s highest-risk flood zones.

While FEMA certainly incentivizes communities to take preventative measures by offering lower flood insurance premiums to participating locales, states still receive “generous disaster relief” regardless of whether or not they actively discourage risky property development, according to this article quoting Larry Larson, director emeritus of the Association of State Floodplain Managers.

The combination of little-to-no discouragement from the government, minimal places where purchasing flood insurance is actually required, and the assurance of federal assistance when disaster strikes, even without flood insurance or risk mitigation efforts, all contribute to an increasingly flood-prone population.

Flood insurance and its current challenges

There’s no doubt that flood insurance, both through the NFIP and through private insurers, does worlds of good for people who have it when they need it. But it’s far from a perfect system, in large part because so few people are covered, and the majority of the U.S. doesn’t accurately understand their risk of flooding. We’ve previously written a comprehensive flood insurance blog post, so if you want to dive deep down the NFIP rabbit hole, check out this coverage. Here, we’ll just cover a few basics before digging into issues with the current landscape of flood insurance coverage in the U.S.

The private flood insurance market

Historically, flood risk has been very difficult to accurately price. Private insurers either suffered massive losses that cost far beyond their premium revenues or had to charge premiums so high that no consumer could pay them. While private flood insurance was available in the U.S. from 1895 to 1927, a couple of catastrophic losses caused most insurers to pull out of the flood insurance market entirely.

In recent years, thanks to more advanced technology and insurers’ ability to harness huge quantities of data, private insurers are starting to show an appetite for flood insurance products once again. With NFIP policies known to be expensive, and offering coverage limits that are far too low to fully replace the average American home in 2022, private flood insurance options may be key to closing an enormous coverage gap.

However, there are still a number of very real barriers to the success of private flood insurance policies. One of the largest is the longstanding rule that only NFIP flood insurance policies would satisfy the legal requirement of purchasing flood insurance for homes with federally backed or regulated mortgages that are located within a Special Flood Hazard Area.

The Biggert-Waters Flood Insurance Reform Act of 2012 was poised to be a game-changer for the industry by requiring lenders to accept private flood insurance policies (not just NFIP policies) for the mandatory purchase requirement, as long as the coverage offered was “at least as broad” as that offered by the NFIP. This was easier said than done. Ten years later, insurers and lenders still lack clarity on what exactly that means, and who is responsible for determining which policies meet the definition.

So, while the number of private insurers offering some type of flood insurance coverage has grown from just 50 in 2016 to over 140 in 2019, the NFIP is by far still the number one flood insurance provider in the U.S.

The creation of NFIP

The federal government created the National Flood Insurance Program precisely because of the lack of private flood insurance options. The unprofitable business prospect, along with a lack of consumer demand, left U.S. households and businesses almost entirely without options for flood insurance coverage by the 1960s.

The National Flood Insurance Program was established in 1968 with the passing of the National Flood Insurance Act. Five years later, a new law called the Flood Insurance Protection Act came into effect and set up mandatory flood insurance purchase requirements for a small subset of U.S. homes located in the riskiest and flood-prone locations. In 1979, the NFIP officially moved under the umbrella of FEMA, which has managed the program since.

Who’s covered by flood insurance?

According to FEMA, less than 4 percent of all U.S. homes are covered by an NFIP policy[A4] , despite the fact that anyone who chooses to participate can do so. A FEMA spokesperson also told us that the program insures around 195,000 non-residential structures, including businesses, non-profits, religious, and governmental buildings. These commercial policies account for about 5 percent of all policies the NFIP has in effect. [A5]

These small numbers mean the vast majority of the nation’s homes and non-residential structures are uninsured or underinsured against flood damages, which aren’t covered by standard homeowners, renters, or commercial insurance policies.

When is flood insurance required?

In 1973, Congress added the mandatory purchase requirement (MPR) to the NFIP. This new provision required specific homeowners to buy NFIP policies based on their home’s location in a Special Flood Hazard Area (SFHA) and the involvement of any federal-backed or federally regulated mortgage lenders.

Along with getting more households enrolled in NFIP coverage, which could help make insurance a more robust source of flood recovery money, the program also hoped to get more communities involved in NFIP-mandated floodplain management regulations by adding MPR.

While instituting some level of mandatory flood insurance coverage did increase the total number of participants in the NFIP, it also increased the number of high-risk properties without adding a proportionate number of lower-risk properties to balance out losses. According to a FEMA spokesperson, as of Sept. 7, 2022, 36.5 percent of residential structures covered by the NFIP are located outside the SFHA where mandatory purchase requirements apply. [A6] This means nearly two-thirds of insured properties are located in the highest-risk areas. When you talk about concentrated risk, this scenario certainly qualifies. And “concentrated risk” is the exact opposite of what insurance aims to do.

Problems with flood insurance requirements

Unlike auto insurance, which nearly every state requires to legally operate a motor vehicle, and unlike homeowners insurance, which mortgage lenders require before approving a home purchase, flood insurance is largely optional for U.S. homeowners and renters.

This mostly optional nature leads to some common insurance problems like adverse selection – when only the riskiest cases purchase insurance. A small pool of high-risk customers isn’t great for any insurer’s solvency, yet because the NFIP is government-funded, it can rely on its ability to borrow from U.S. taxpayers to cover excess losses.

Still, this isn’t ideal. According to a thesis published in the Journal of NPS Center for Homeland Defense and Security, “The NFIP is not structured to withstand claims and losses associated with catastrophic flood events.”

Case in point, the thesis describes how multiple hurricane seasons between 2004 and 2012 landed the NFIP $24 billion in debt to the U.S. Treasury with little hope of generating enough insurance premium revenues in the future to repay that debt. Even with the ability to transfer some risk to the private insurance market through purchasing reinsurance, the NFIP doesn’t reduce its overall costs. Given how expensive those reinsurance premiums are, the NFIP can lose even more money in years when losses are large but don’t meet the threshold for reinsurance to kick in.

If the NFIP continues to function as it historically has, with flood damages becoming more and more costly, the obvious prediction is that the program will go further into debt, ultimately causing U.S. taxpayers to foot the bill. And that’s assuming Congress continues to reauthorize such a costly program into the future, which isn’t at all a given.

Why don’t more people have flood insurance?

There are several reasons we can hypothesize as to why only about 3.5 percent of all U.S. homes are covered by flood insurance. A combination of factors play into it, from cost to availability, to understanding the need, and even consumers’ perception of their risk level.

1. Consumer education

This may come down in large part to education, or lack thereof. A 2020 Insurance Information Institute (III) consumer poll found that 27 percent of homeowners believed they had flood insurance coverage, which is “far higher than credible estimates” according to III.

This discrepancy could mean consumers think they have flood coverage when, in fact, they don’t. It’s possible that homeowners (wrongly) assume flood coverage is built into their traditional homeowners insurance policy. In reality, most homeowners insurance policies cover water damage in very limited circumstances, like if a pipe bursts, a tree falls on your roof and rain gets in, or the damage from water used to put out a house fire. As a rule, homeowners insurance policies don’t cover flood damage caused by heavy rains, hurricanes, or overflowing rivers. This type of uncovered damage is more common and more costly than people realize.

2. A discrepancy between perceived risk and actual risk

As we mentioned previously, NFIP flood insurance is only required in a small number of cases: homes located in FEMA-designated Special Flood Hazard Areas that also have a federally backed or regulated mortgage. Since the vast majority of homes in the U.S. don’t fall into this category, it’s easy for consumers to walk away with a false sense of security in terms of their personal flood risk.

According to a FEMA spokesperson, “A significant barrier to addressing the nation’s flood risk is home buyers’ and renters’ lack of awareness about flood risk when they complete real estate and lease transactions.” This means, if a property isn’t located in a FEMA-designated SFHA, buyers and lessees aren’t necessarily informed of the real flood risk before they buy or enter into a lease.

Would homebuyers be more likely to purchase flood insurance if they knew their soon-to-be home had a history of flooding, NFIP claims, and even disaster aid awarded to past owners? FEMA thinks so, and homeowners agree.

Currently, the majority of states don’t have laws requiring sellers to disclose this type of information to buyers. This is particularly concerning in flood-prone states like Florida and West Virginia (neither of which have disclosure laws). The Natural Resources Defense Council (NRDC) reports that homeowners are likely to incur tens of thousands of dollars in damage when they purchase homes that have previously flooded – often without knowing it, and without purchasing flood insurance.

So, consumers might feel a false sense of security when they shouldn’t. As one National Association of Insurance Commissioners report states, “everyone lives in a flood zone.” Although the FEMA-designated SFHAs are at highest risk of flooding, the actual chance of a home outside of an SFHA incurring flood damage isn’t necessarily low.

FEMA tells us, “since 2010, one-third of claims filed were located outside of the SFHA.” [A7] Climate change is also playing a role in making non-SFHA locations riskier. According to an article in Digital Insurance, “Areas considered low risk for flooding have been taking a beating as warming waters and rising sea levels exacerbate both the speed and intensity of storms.” Since FEMA hasn’t changed its designated SFHAs in light of climate change and its impacts on severe weather, homeowners may not realize they’re still at significant risk of flooding even when they live outside of a “high risk” area.

3. The cost of flood insurance

The cost of flood insurance premiums is also a factor that deters some consumers. Compared to a standard homeowners insurance policy, that will rebuild your house if it burns down (for example, among a number of other covered perils), NFIP flood insurance premiums can feel quite high.

To illustrate the discrepancy, a typical homeowners insurance policy might run you around $1,200 per year, which you can pay in monthly installments through escrow if you have a mortgage. NFIP flood insurance policy premiums vary dramatically based on a number of risk factors, but can cost anywhere from under $700 to upwards of $1,400 each year. A FEMA spokesperson tells us that the median residential policyholder currently pays $688 per year for the maximum coverage levels: $250,000 for the building and $100,000 for its contents.

As of now, NFIP flood policies have to be paid in full at the start of the year. Considering the price of these policies could be as much as, or more than, a homeowner’s policy – and they only offer protection for one very specific hazard – it’s easy to understand why homeowners may feel their personal risk of flooding isn’t worth the price of flood insurance.

Another affordability factor is how rates have been calculated, up until now. According to a FEMA spokesperson, replacement value cost was not historically used as a factor in creating NFIP premiums. This led to lower-value homeowners paying higher premiums than they should have been, while high-value homeowners paid less than they should have been. As a result, lower income homeowners with lower value homes were paying disproportionately high rates and flood insurance became unaffordable for many.

AgentSync: What is FEMA doing to increase affordability in NFIP insurance premiums to help more homeowners get the coverage they need?

FEMA Spokesperson: For over 50 years, replacement cost value was not a rating factor under the National Flood Insurance Program. Lower income households commonly have homes with lower replacement cost values (RCV). Over the last year the NFIP has overhauled its rating methodology with an initiative called Risk Rating 2.0: Equity in Action. Among other enhancements, replacement cost is now a key component of Risk Rating 2.0 and ends the inequity wherein lower value homes have been paying more than they should and higher value homes have been paying less than they should. This levels the playing field for all policyholders. As a result, we are delivering rates that are fair and equitable for all.

Under a new initiative called Risk Rating 2.0: Equity in Action, the NFIP expects flood insurance rates to come more in line with home values. For many homeowners, this will mean a reduced flood insurance premium. The Association of State Floodplain Managers (ASFPM) and The Pew Charitable Trusts have partnered to create an interactive map that projects how NFIP flood insurance rates will change based on geography.

Reducing federal flood loss spending by increasing flood insurance coverage

As catastrophic flood losses increase, spreading the risk across a much larger population is one potential solution. Whether that’s done through communication and promotional efforts to increase voluntary flood insurance uptake, or through greater (perhaps universal) mandatory flood insurance requirements, getting more low-risk policyholders into the risk pool is insurance solvency 101.

Increasing voluntary flood insurance adoption

According to a FEMA document from 2018, the agency’s goal is to double the number of properties covered by NFIP flood insurance by 2023. Even so, the result would still be less than 9 percent of U.S. properties obtaining NFIP flood insurance coverage. Given how few homeowners are required to purchase flood insurance, we wondered how nearly universal coverage would impact everyone, from covered individuals to taxpayers to insurers.

Apparently, we’re not the only ones thinking along those lines. The University of Pennsylvania’s Wharton Risk Center has a policy working group dedicated to the discussion of including flood insurance in all homeowners insurance policies. According to their analysis, doing this has potential benefits for all of the following groups:

Consumers: By simplifying the process and ensuring they have all the coverage they need wrapped into one policy, without room for misunderstanding and errors. It could also keep premiums lower when the risk of a flood is combined with all other homeowners’ insurance risks.
Private insurers: By removing the expense and hassle of legal battles they currently engage in when debating whether a property’s “flooding” was caused by something covered under the homeowner’s policy or falls to the insured’s NFIP policy. A single policy including homeowners and flood insurance would also likely “reduce administrative, marketing, and adjustment costs” for these insurers.
Taxpayers: By increasing the number of covered homeowners, thereby giving the necessary resources for individuals and the entire community to recover more quickly when flood damage occurs, without burdening taxpayers with the cost.
FEMA and other government agencies: With more households covered by a built-in flood policy, far fewer will have to rely on emergency assistance to recover.

This idea isn’t without potential down sides. Namely, it would rely on getting every major homeowner insurance carrier onboard and overcoming their hesitations and fears surrounding the ability to charge risk-based rates. The ins-and-outs of state-based insurance rate regulations and the nuances of admitted and non-admitted insurance policies also come into play.

Even if flood insurance doesn’t become a standard part of homeowners insurance, the Wharton Risk Center poses other potential solutions in its 2019 brief “Moving the Needle on Closing the Flood Insurance Gap.”

For example:

Switching to an “opt-out” system means flood insurance would be the default unless homeowners opted out. In most cases, this type of arrangement leads to greater adoption of the default option since people tend not to take any action.
A “mandatory offer” requirement would mean homeowners insurance carriers and agents selling on their behalf would be required to bring up the topic and offer coverage (either NFIP or private insurance) during each and every homeowner insurance policy sale.
Community-based policies, through which municipalities would purchase flood insurance for their residents and then make back the premium costs through taxes or assessments.
Escrowing flood insurance into mortgage payments and instituting auto-renew on policies to ease the large financial burden of paying upfront and the natural churn of non-renewed policies.

None of these options would be the same as mandatory purchase requirements, but they would at least ensure homeowners were more aware of their flood risk and the benefits of flood coverage, and likely increase flood insurance uptake through the simple behavioral economics involved in opting out versus opting in and auto-renewals versus manual renewals.

Expanding mandatory purchase requirements

What if we went even further and actually required a minimum level of flood insurance coverage on every home? From FEMA’s perspective, some level of universal mandated flood insurance coverage would benefit everyone. Every homeowner and business would have a baseline level of protection; revenue from premiums would come closer to (if not exceed) claims costs; premiums could be more affordable for everyone with a larger risk pool; and taxpayers wouldn’t be on the hook for both excessive NFIP claims and uninsured losses. Achieving this, however, would require legislation from Congress. And, currently, lawmakers don’t appear to have an appetite for increasing mandatory flood insurance requirements.

AgentSync: Would the federal government spend less money on flood recovery if some level of flood insurance were mandatory for all homeowners?

FEMA Spokesperson: Currently the NFIP has large concentrations of risk. When events occur in these areas, losses far exceed premiums. With universal coverage, these losses would be spread across a larger premium base, reducing overall losses. This would enable the program to reduce the premium costs associated with retained and ceded risk loads.

Furthermore, from a program perspective, universal coverage would improve the program’s ability to cover large losses with less reliance on the Federal Treasury.

These are some benefits of a hypothetical universal flood insurance coverage requirement, however, one possible benefit – lower flood insurance premiums for everyone – isn’t as likely to be realized even if every property were insured for floods. According to a FEMA spokesperson, “Nearly universal coverage could reduce premium costs, but only to a degree. The foundation of the premium is the expected losses. The expected losses do not vary because more or fewer people are covered.”

The bottom line is that a greater proportion of covered homes, or (miracle of miracles!) universal flood insurance coverage, would have a greater benefit to the program as a whole including cost-savings to taxpayers and potential revenues for private insurers. But it likely wouldn’t have a large impact on the premiums each policyholder pays.

The role of private flood insurance in expanding coverage

The vast majority of flood insurance policies are written by the NFIP. However, in recent years, there does appear to be an upward trend in private flood insurance policies. As of 2018 data from the National Association of Insurance Commissioners (NAIC), private flood insurance made up about 15 percent of the entire flood insurance market (both residential and commercial).

Private flood insurance policies can be attractive to consumers both because they may be less expensive than NFIP policies for some households, and because NFIP flood insurance policies also have fairly low limits. The maximum available coverage for residential properties is $250,000 for the building and up to $100,000 for the contents of the building. For commercial policies, the limits are $500,000 each for both building and contents. If nothing else, insurance carriers have the opportunity to corner the market on supplemental flood insurance policies for households, businesses, and others who require higher coverage limits than the NFIP offers.

In its report “Stemming a Rising Tide: How Insurers can Close the Flood Protection Gap” the III emphasizes the major role emerging technologies will play in the success of future private flood insurance policies. Unlike the private flood insurance policies of the late-19th and early-20th centuries, today’s flood insurance carriers can leverage data, predictive modeling, analytics, the Internet of Things (IoT), and more to create efficiencies in all aspects of their business, resulting in a profitable model of flood insurance. From pricing to underwriting to paying claims, modern technology can enable private insurers to turn flood insurance into a viable and marketable line of business that also helps consumers secure protection for an ever-increasing and costly risk.

The future of the NFIP and flood insurance

According to the National Association of Insurance Commissioners (NAIC), the NFIP was “meant to be a temporary solution.” Though it began more than 50 years ago and has served Americans well in that time, the program’s future isn’t guaranteed. This is particularly true if the program can’t find a way to fund itself without going further into debt.

NFIP periodic reauthorization

Since the program’s inception in 1968, Congress has continued to reauthorize the NFIP periodically. The most recent long-term reauthorization ended in 2017, and since then, the program has survived thanks to a string of short-term funding extensions. However, as catastrophic storms increase in frequency, severity, and cost, it’s possible that simply reauthorizing the program in its current form isn’t enough.

Existing and proposed NFIP reforms

As the program’s (recently-extended) Sep. 30, 2023, deadline looms, FEMA writes, “NFIP reauthorization is an opportunity for Congress to take bold steps to reduce the complexity of the program and strengthen the NFIP’s financial framework so that the program can continue helping individuals and communities take the critical step of securing flood insurance.”

Over the last year, the NFIP has made a major change already by implementing Risk Rating 2.0: Equity in Action. According to a FEMA spokesperson, “Among other enhancements, replacement cost is now a key component of Risk Rating 2.0 and ends the inequity wherein lower value homes have been paying more than they should and higher value homes have been paying less than they should. This levels the playing field for all policyholders. As a result, we are delivering rates that are fair and equitable for all.”

Other potential, but not-yet-implemented reforms include:

An NFIP Flood Insurance Targeted Means-Tested Assistance program to help low-and moderate-income households obtain and maintain flood insurance. This program would offer a graduated discount that would scale based on the policyholder’s income, thereby enabling eligible households, particularly historically underserved households, to obtain flood insurance. This would also contribute to climate resilience by facilitating access to flood-mitigation grants and other resources that require flood insurance as a condition of eligibility.

A proposal to allow for installment plans so that NFIP policyholders would be able to make monthly payments for flood insurance just like they do for other goods and services without having to rely on escrow.

A proposal to simplify NFIP forms to enhance the customer experience, making these forms similar to ones for other insurance products consumers are used to signing. FEMA believes that even small, or aesthetic, changes can make an impact on closing the protection gap.

In total, the Department of Homeland Security submitted to Congress, in May of 2022, 17 legislative proposals to reform FEMA’s National Flood Insurance Program. These proposals included provisions to ensure more Americans are covered by flood insurance by making insurance more affordable to low- and moderate-income policyholders.

AgentSync: What does the future of the flood insurance market look like?

FEMA Spokesperson: Questions about the future are difficult to answer. We know that climate change is impacting insurance markets. The extent of that impact will be borne out in time. We do know that the flood insurance market will have to be adaptable to respond to changing conditions. The market comprises many factors such as evolving actuarial science and catastrophic modeling, reinsurance, and affordability of the product in the context of larger economic trends. There are also a number of players such as the NFIP, Write Your Own insurance companies, private insurers, flood vendors, realtors, and insurance agents.

This year the Federal Insurance Directorate drafted a 10-year vision “to enable and support all Americans to reduce their evolving flood risk and achieve peace of mind.” Alongside this vision, our accompanying mission statement for 2022-2032 is “providing customer-focused flood insurance to help survivors and their communities recover effectively from flood events.”

This is the role we see ourselves playing in the flood insurance market and continue to look for opportunities to collaborate and innovate to provide the American public options to address their flood risk.

Is more flood insurance the answer?

With all of this said, is increasing access to, affordability of, and adoption of flood insurance the key to controlling the financial impacts of Mother Nature’s ever-increasing wrath?

The answer is a bit of yes, and no.

Although one of the NFIP’s own stated goals is to limit the need for federal disaster aid through the use of insurance, a study by the Wharton Risk Center (requested by FEMA) concluded, since federal aid for disaster recovery to individuals makes up such a small portion of all federal disaster aid monies, increasing mandatory purchase requirements would have little impact.

This may be true when we’re talking about programs like the IHP, which as of the 2023 fiscal year caps benefits at $41,000 in individual living expense grants per household (and, according to the Wharton Center’s report, average recipients get just a fraction of that). But for the long-term sustainability of the NFIP itself, an entirely separate topic from federal aid for uninsured losses, increasing the number of insured properties and de-concentrating the risk, should be expected to help keep the program in the black.

Prevention, education, and mitigation

Aside from simply getting more homeowners to purchase flood insurance, the NFIP aims to reduce flood damages and their costs by encouraging communities to adopt better flood prevention strategies. As the effects of climate change bring more and more locations into higher and higher risk categories, local, state, and federal governments should probably consider more tactics like the ones adopted in Milwaukee County, Wisconsin. It’s one of the rare places in the U.S. where fewer people live in a flood hazard area now than 20 years ago. Milwaukee achieved this by using regulation and infrastructure investments to eliminate development in flood zones, with a goal of removing all homes from the floodplain by 2035.

The technology solution for insurance companies

Right now, the world is facing a greater-than-ever-before level of risk from flooding, and private insurers have an opportunity to capture a vastly underserved market. According to Milliman, the 2021 U.S. private (not NFIP) flood insurance market had about $4 billion in written premium, while the potential market could be up to $47 billion in premium. That’s a lot of green space for insurers to capture!

And technology will be instrumental in insurers’ success. Whether it’s using advanced modeling to accurately predict risk and price policies, automating the claims process to reduce wasted human-hours, or presenting consumers with an easy purchasing experience online or via an app, insurance carriers won’t be able to grow their flood insurance business without going all-in on modern tech.

Licensing, compliance, appointments, producer onboarding/termination, carrier contracting, and continuing education are no exception! If you’re looking to expand into new lines of business, develop new partnerships, or grow your existing ones quickly and without overlooking insurance compliance, check out what AgentSync can do.

Topics
Catastrophe
Trends
Flood
Windstorm