From a flood insurance penetration standpoint the insurance industry is behind the curve. Post Hurricane Harvey, it came to light that a staggering 80% of the homes in Houston were not insured for flood.1 The flood insurance penetration rate was not much better in New York and New Jersey during Superstorm Sandy2. Note that these are coastal states where hurricanes and extreme flooding events are common and where homeowners and businesses should be more aware of the risks. Across the country, according to the Insurance Information Institute, only about 12% of homeowners in the U.S. purchase flood insurance.3
Exacerbating the situation is the fact that an extremely large number of Americans are living in one in 100 year flood zones, or areas that have a 26% chance of flooding over the course of a 30 year mortgage. A recent study by scientists and engineers from University of Bristol and Princeton University revealed that approximately 40 million Americans are living in 100 year flood zones.4 This corresponds to $5.5 trillion of property value! In contrast, only 5 million policies are in force by the NFIP.5 This protection gap is significant and can have a major impact on the economy as there is a direct impact on taxpayers’ money and thus the overall GDP.
Part of the solution for this flood insurance protection gap is better communication of the risk. Unfortunately, Flood Insurance Rate Maps (FIRM), the official flood maps in the U.S., are not frequently updated and are binary in nature (i.e., either you are “in” or “out” of the flood zone). Both Sandy and Harvey events showed several instances of FIRM being inadequate to evaluate the extent of flooding. The FIRM designate the flood risk at a point in time and do not reflect the changing risk of the property. Flood models and flood tools have developed well past the outdated FIRM methodology and can inform more risk appropriate pricing.
The 21st Century Flood Reform Act, which provides a package of National Flood Insurance Program (NFIP) reforms and has been passed by the U.S. House of Representatives, is a good start toward improving flood risk awareness. The Federal Emergency Management Agency (FEMA) would have to use, apart from the applicable FIRM, other appropriate risk assessment models, data and tools to communicate flood risk. FEMA should also consult governmental agencies like the U.S. Geological Survey (USGS) and the National Oceanic and Atmospheric Administration (NOAA) to obtain information relevant to flood insurance mapping.
The bill also includes requirements in order to increase consumer choice through private flood insurance market development. This includes broader coverage offerings, removing the non-compete clause restricting Write Your Own (WYO) companies from selling private flood insurance, and allowing a policyholder to switch between NFIP and the private flood market. The private market is unlikely to take on NFIP properties that have incurred multiple flood losses, or “repetitive loss properties”, so the bill fortifies the solvency of the NFIP by limiting coverage and charging premiums that reflect the actual flood risk of those properties. While these are some of the proposals that the U.S. House of Representatives has passed, the final decisions and changes are yet to be approved by the full Congress.
In May 2017, FEMA’s Deputy Associate Administrator for Insurance and Mitigation Roy Wright challenged everyone to aim to double the number of flood insurance policies, both NFIP and private insurance by 2023. A goal like this is crucial for increasing the flood insurance penetration, thus making our communities more resilient. While there have been three extensions so far, extending the existing program without meaningful reforms does not improve flood resiliency. Hopefully Congress considers meaningful changes, without lapse, to the NFIP with an outlook for a long term reauthorization of the program and a more flood resilient future for the United States.
1 Insurance Business America, “Majority of Harvey Victims did not have flood insurance,” January 2018.
2 Rutgers School of Public Affairs and Administration, “The Impact of Superstorm Sandy on New Jersey Towns and Households,” October 2013.
3 Insurance Information Institute, Facts + Statistics: Flood Insurance, October 2017.
4 BBC News, “US Flood Risk Severely Underestimated,” December 11, 2017.
5 Federal Emergency Management Agency, “Policy Statistics Countrywide,” November 2017.