As coastal development surges and sea levels rise, more Americans than ever before are living in high-risk areas for flooding – yet they are doing so without proper insurance coverage.
According to data from the National Flood Insurance Program, the number of government-sponsored flood policies in force has plunged by nearly 10% in the past six years, from 570,000,000 in 2009 to just 5,151,000 in 2015. It’s a large fall, but in the opinion of Robert Hartwig, economist and president of the Insurance Information Institute, it is one that’s only going to get larger.
“It’s sad to say, but that gap is going to increase,” Hartwig said. “People are reacting to price increases that have been put in place because [NFIP] is broke.”
Those price increases are the result of the Biggert-Waters Act and subsequent legislation, which were designed to move toward more actuarially sound rates and ease some of the $24 billion debt into which the program was plunged following Hurricane Katrina in 2005. Premium rates jumped 15% to 18% for new and renewal policies on primary homes, and 25% on secondary homes or homes that have suffered repeated losses.
Also contributing to consumer reticence toward insurance is a lack of significant flood damage, says Hartwig.
“Memories are short,” he said. “It’s been nearly 10 years since the last major hurricane in Florida – the longest span in history. And it does not take long for a gap between events for people to start questioning why they need this coverage.”
Unfortunately, those dropping their NFIP policies are not turning to the private market either.
Though that market is still quite a small one, it is growing.
Dan Freudenthal, president of Florida-based brokerage Agency Flood Resources, says the opportunity for both insurers and agents in such an environment is great.
“We are seeing that as NFIP costs increase, people are picking up the phone, calling their agent and saying ‘What do you have as an alternative?’” said Freudenthal, who notes that the recent premium increases are the highest he’s seen in 15 years. “In the coming three years, a lot of interesting things well happen. The private flood market is about to burst.”
The road to such a dynamic and sustainable private market, however, is still fraught with obstacles.
NFIP rates are still too low to entice many carriers to offer their own flood products. From 2003 to 2012, annual losses or paid claims through NFIP averaged $4 billion a year while the average amount of premiums written was $2.6 billion.
Getting to rates where even NFIP will break even is vital for a healthy private market, and Brady Kelly – executive director of
NAPLSO – doesn’t see that happening in the near future.
“The NFIP rates have been woefully inadequate for a long time. Until NFIP gets real about pricing, the private market can’t compete for risks that currently flow through that program,” said Kelly. “That’s still quite a way off. There are still caps on rates, and a 25% increase doesn’t make them actuarially sound.”
