Private Market Flooding?

For many years, floods were considered an uninsurable hazard, with private insurers choosing to stay away rather than try to outguess Mother Nature in order to underwrite the risk.

The absence of a private market was the driving force behind the creation of the National Flood Insurance Program in 1968, and for more than 50 years NFIP has been virtually the only option for stand-alone flood insurance policies. A recent Wharton study of private market options estimated that the program writes 84% of flood premiums, with the combined residential and commercial market accounting for just 16%.

“In flood, there wasn’t the computer power in the 1960s to measure and manage the risk,” says Nancy Watkins, principal and consulting actuary for Milliman. “If insurance companies underestimated the risk, it could be catastrophic. That is why NFIP was created—to provide pre-disaster financing, taking premiums from the most risky properties and using them to pay off claims for floods that inevitably happen somewhere.”

But times change, and the growing availability of sophisticated flood mapping, modeling tools and reinsurance options has spurred a new interest in private flood insurance for both commercial and residential properties, the vast majority of which do not have flood coverage. The private market potential is huge, with estimates of premium opportunity ranging from $30 million to more than $50 million.

“There are a lot of uninsured properties. The fact that the NFIP has only five million policies in the country is pretty staggering,” says Patricia Templeton-Jones, president and chief program officer for Wright National Flood Insurance Services, the largest provider of NFIP policies. “I think that is where the private market will come into play. Not just flood policies, but optional coverages too.”

“The NFIP was always to have been a temporary solution until the private sector could get its act together,” says Robert Gilliam, president of Vanguard Claims Administration, which serves as a third-party administrator for a number of Lloyd’s syndicates that are eagerly pursuing flood business in the United States. “Now we have mapping, modeling and much better access to data that allows that kind of underwriting to occur, and that is what sparked the interest.”

So far, Lloyd’s syndicates and smaller insurers have been more active than larger insurers in writing the policies. At a National Flood Conference in Washington in June 2019, participants estimated 120 carriers were writing private flood insurance in 2018, up from 90 the previous year.

Private Market Solutions

The commercial market has been offering private flood options for years, either as part of an all-risk policy or as excess or surplus lines coverage on top of primary policies. At first, the private coverage option was used primarily by larger properties because NFIP’s coverage limit was too low for a major business venture. But recently more middle-market and small businesses also have begun to explore commercial coverage.

The move toward private flood coverage is based not only on the need for higher coverage limits than NFIP provides—$500,000 each for property and contents for commercial policies; $250,000 for building and $100,000 for contents in residential policies. Those buying private flood coverage often recognize that private policies offer protection and benefits, such as business interruption coverage, that NFIP policies do not.

For example, AmWins and The Flood Insurance Agency recently launched a new commercial property flood product called FloodFLEX designed to address expenses not covered by NFIP policies. FloodFLEX payments may be used by an insured for any purpose, ranging from lost income and depreciation to evacuation expenses for assisted living facilities and extended loss of revenue resulting from community blight.

“After the devastating hurricanes in the past two years and the extensive flooding that ensued, it became clear that there was a need for a new product that provided coverage for many of the unexpected expenses that insureds face in the aftermath of a flood,” says Evan Hecht, chief executive officer of The Flood Insurance Agency, in announcing the new venture.

“It’s the wild, wild West out there,” says Vanguard’s Gilliam. “When the private market steps back into a line of coverage, all the competitiveness comes back in. Instead of having to abide by what FEMA dictates to us, we can now have a different type of coverage. Lots of private companies are offering extra living expense coverage to help an insured get a head start in figuring things out. NFIP never allowed that.”

Timothy McCoy, the managing director at Insurmark/Floodwatch, an Aon subsidiary, says the move from NFIP to private flood coverage is the biggest change he has seen in the commercial market.

“A few years ago in writing commercial property insurance, flood was almost an afterthought,” McCoy says. “It seemed you got the policy for the property all together and then, in the last minute, it was, ‘Do something with flood.’ In the last three or four years, there has been a turnaround. Many times now, flood is the driver. And as flood coverage is more acceptable, a good insurer can provide options.”

Christopher Heidrick, of Heidrick & Company Insurance and Risk Management Services in Sanibel, Florida, says private flood coverage is growing faster than all traditional lines of property/casualty.

Currently, private commercial policies are far more common than residential coverage. A July 2018 Wharton study of the private residential flood insurance market estimated that private insurers issue only about 4% of all residential flood policies. The study said Assurant was the largest writer of private residential policies with about 40% of the premium, followed by AIG (26%), Swiss Re (19%), and Chubb (4.5%).

“Private market growth to date has largely been driven by the interest of global reinsurers in covering more U.S. flood risk,” the Wharton study found. “In the admitted market, reinsurers are assuming most of the risk for private insurers, often in excess of 90%. In the surplus lines market, Lloyd’s of London has played a major role, backing the majority of residential flood policies.”

Tim Russell of The Russell Agency in Fairfield, Connecticut, immediate past president of Professional Insurance Agents, says he is seeing more interest in private flood insurance in his area. “I do see in Connecticut that the private market is starting to take a larger share of the overall book of business,” Russell says. “In my area, the private market is the most competitive in pre-FIRM homes, meaning homes built around 1972 in a flood zone. I find that the private companies are very competitively priced. I also see a big difference in pricing between the private companies.”

Regulatory Action

The private market for both commercial and residential flood coverage is growing fastest in states such as Pennsylvania and Florida that have removed many onerous regulatory requirements to encourage private companies to start writing policies.

Milliman’s Watkins says that, as a result of state actions to encourage private flood insurance, Florida now has more private policies and more different insurers offering private residential flood policies than any other state.

Heidrick thinks familiarity with flood insurance played a role in the growth of private coverage in Florida.

“Florida itself accounts for 38 to 40% of all NFIP policies that are in force and represents the largest segment of the flood insurance market in total,” Heidrick says. “There’s an argument to be made that you might want to jump into an existing opportunity where there is demand. It is easier to write business where people are already buying the product and see the risk. The best argument for private is that it comes down to what the consumer needs. The private products that we have better address the risk exposures and concerns of the property owner. Price is part of that but not all of it.”

Frank Nutter, president of the Reinsurance Association of America, says Lloyd’s has always been the insurance of first choice in the surplus lines market, particularly for high-valued properties in coastal areas. “But if you look at the mix of companies writing in Florida, there are a lot of small companies now writing it, often with significant backing from reinsurance,” Nutter says. “It is good incentivizing for small companies with that kind of backing.”

Watkins thinks regulatory hurdles are the main reason that more big insurers hesitate to start offering private coverage. “If you think about a company that offers home insurance in 50 states and it is very unclear on what state regulation is going to be like in maybe all but eight states,” Watkins says, “they may feel pretty confident they can write in those eight states. But in the other 42 states, there are lots of question marks because regulators in many places have not made clear how they are going to regulate private flood.”

Patricia McHugh Lambert, a principal at Pessin Katz Law, in Towson, Maryland, says she expects to see regulators getting more involved with a growing private market. “State regulators have been somewhat limited in the past,” she says, “because it was a federal program and federally regulated.”

Spreading the Risk

Some critics suggest that the private flood insurance movement might result in insurers “cherry-picking” the best risks from NFIP policies and leaving the federal program with only the properties and businesses most likely to suffer flood damage. But others disagree and say that carriers are looking for a diverse book of business rather than only the best risks.

“I think it will be about spreading risks. There are no cherries in NFIP,” says Wright’s Templeton-Jones. “Even in Lloyd’s syndicates, they are insuring some very inexpensive properties and some very expensive ones. It is based on appetite and what sort of mix they need to be profitable as private insurers.”

Nutter cites the experience of Florida Citizens, a state-owned and managed insurance company providing homeowners insurance, as evidence of the desire of insurers to spread the risk. For several years, he says, Florida Citizens has invited insurance companies to come in and choose properties in its book of business to insure.

“They found that companies are very interested in a spread of risk,” Nutter says. “Essentially what companies are doing is looking at this as a way to diversify their book of business. We think that will be what happens, that insurance companies will look for a mix of business across the spectrum of risk.”

“If you look at other lines of business,” Heidrick says, “whether it be homeowners or auto, we’re accustomed to having multiple insurance companies with their own right way of selecting and pricing risk in the market. Even if there are multiple companies in the same market, they all end up making a profit. So the argument that private companies will pull off the most profitable risks from NFIP doesn’t match up with what we see in all other lines of insurance.”

FEMA also does not seem to be concerned about “cherry-picking.” For example, in June, FEMA released NFIP data including more than two million claims records dating back to 1978 and more than 47 million policy records for transactions from the past 10 years. In a release announcing the action, David Maurstad, FEMA’s deputy associate administrator for insurance and mitigation, specifically said the agency hoped the data would assist the private market.

“The proactive publication of this data will assist the private market to grow in the flood insurance space and help close the insurance gap,” Maurstad said. “The private market will now be able to identify areas with prior flood claims and historical flood insurance policies.”

Risk Rating 2.0

FEMA has also engaged agents and brokers in the development of Risk Rating 2.0, its initiative to replace its much-criticized flood map system, which is used to calculate premiums on both residential and commercial policies with an approach that the agency hopes will more accurately reflect actual flood risk for individual properties. Again, FEMA has made it clear it is counting on a public-private cooperative effort to increase the number of businesses and residences with flood insurance. Risk Rating 2.0 will take effect in October 2021.

Clearly, Risk Rating 2.0 will have a significant impact on both the residential and commercial market, but so far most of the information that is available and most of the discussion has focused on residential coverage.

Nutter says that, while the private flood insurance market is growing, for the near term the National Flood Insurance Program will remain the dominant player in insuring flood. “The private sector will offer private insurance, not in competition with the federal program but as complementary to it,” Nutter says.

Wharton researchers predict the private market will grow when large insurers become more confident in mapping, risk modeling and other technologies to improve underwriting.

“The largest U.S. homeowners’ insurance companies have generally been hesitant to enter the flood market, although a few have begun to enter through subsidiaries,” the Wharton study reported. “As insurers’ familiarity with flood catastrophe models grows, as underwriting experience develops and as state regulatory structures evolve, the number of private flood policies in force could continue to grow, including among admitted carriers.”