Wind vs. Water

On Oct. 8, as The Council’s Board of Directors met during the annual Insurance Leadership Forum at the Broadmoor in Colorado Springs, several Florida executives were conspicuously but understandably absent.

Less than two weeks after Hurricane Helene battered a swath of the eastern United States, Hurricane Milton was barreling toward Florida’s West Coast with winds as high as 150 mph and talk of a 12- to 15-foot surge in Tampa Bay.

Though Milton did not present a worst-case scenario in terms of storm surge, more than 20 people died (including one insurance brokerage employee that we know of). Initial estimates of insured losses are $22 billion to $36 billion, according to Moody’s, with total economic damages more likely around $100 billion. Helene, meanwhile, inflicted fewer insured losses but took a much more devastating human toll.

Had the Milton surge swamped Tampa Bay, we could well have been looking at an insurance crisis that rivaled Hurricane Katrina in 2005—specifically with the issue of wind versus water (very basically, homeowners insurance covers damage from wind but not flooding). Katrina was a reputational nightmare for the insurance industry after allegations (and lawsuits) emerged asserting that fraud was committed during the claims process by a couple of major personal lines direct writers. In one case that was settled in July 2022, two former adjusters sued State Farm Fire and Casualty Co., a subsidiary of State Farm Insurance, saying the company defrauded the National Flood Insurance Program (NFIP) by submitting claims for policyholder flood damage that was really committed by wind and should have been covered under private insurance.

The majority of insurers in the personal and commercial space acted honorably, but the damage was done.

Has the industry learned the lessons of Katrina? Certainly, claims adjustment practices have evolved.

But on the very eve of Milton’s landing, the Florida Department of Financial Services issued an emergency rule warning of “unfair and deceptive acts” and “post-storm fraud” by insurance carriers. It was hardly a statement of confidence that the industry as a whole would act in the best interests of policyholders.

A Never-Ending Stopgap

It also doesn’t help the private market that the NFIP, which is managed by the Federal Emergency Management Agency (FEMA), has been widely recognized for decades as deeply flawed. When the NFIP was enacted in the 1960s after Hurricane Betsy devastated Louisiana, Congress stipulated that “a program of flood insurance can promote the public interest by providing appropriate protection against the perils of flood losses and encouraging sound land use by minimizing exposure of property to flood losses.”

The NFIP was supposed to be temporary—providing insurance for flood damage where homeowners policies do not—and assumed that states and localities would develop land use policies that precluded development in designated flood zones. However, the NFIP continues to insure properties subject to repetitive losses even if no improvements are made to protect against future flooding.

The maps for those zones have also proven inadequate over time— to the point that when Hurricane Harvey hit Houston in 2017, more than three-quarters of the over 200,000 damaged homes were not in a designated flood zone.

According to FEMA, since the 1970s and up until the introduction of Risk Rating 2.0 in 2021, rates had been predominantly based on relatively static measurements that didn’t consider changing flood risk.

Moreover, coverage limits under the NFIP have not remotely kept pace with inflation. For homes, the limits are $250,000 for structures and $100,000 for contents. More than 40% of homes are estimated to be valued above those limits. For commercial buildings, the limit is $500,000 for both structures and contents.

Ultimately, the NFIP has taxpayers subsidizing unrealistically low premiums that incentivize construction on dangerous land. Its discounts are available even to wealthy homeowners.

Congress has debated endlessly about the NFIP. The bipartisan Biggert-Waters Act of 2012 sought to dramatically reform the program and restore a measure of actuarial soundness, but a consumer and homebuilder outcry led to many of its provisions being repealed just two years later. Congress has passed 17 short-term reauthorizations of the program since 2017.

FEMA created its new Risk Rating 2.0 methodology with the goal of providing fair and transparent flood pricing that more accurately reflects an individual property’s potential risk. The agency says the system provides FEMA the “capability and tools to address rating disparities by incorporating more flood risk variables.

These include flood frequency, multiple flood types—river overflow, storm surge, coastal erosion, and heavy rainfall—and distance to a water source along with property characteristics such as elevation and the cost to rebuild.” FEMA is incorporating private sector data sets, catastrophe models, and evolving actuarial science into its revised rating system.

But the system is far from perfect and there have been calls to reform its pricing formulas already. In a July 2023 report, the Government Accountability Office stated, “The new methodology substantially improves ratemaking by aligning premiums with the flood risk of individual properties, but some other aspects of NFIP still limit actuarial soundness.” The report highlighted affordability concerns for some policyholders. In June 2023, Louisiana and nine other states, 43 Louisiana parishes, and more than a dozen levee districts filed suit against the Department of Homeland Security and FEMA citing a breach of statutory authority and miscommunication of rates. As of March 2024, however, only the state and a couple parish claims remain.

A good impact of the reform is that the private flood market has become more vibrant—but the new pricing has forced many who need flood coverage to forgo it.

Through the Flood Insurance Producers National Committee, The Council is engaged with NFIP and FEMA as they address fundamental questions of how flood insurance is provided and priced. Over time, the industry will evolve to better meet flood needs. But the NFIP—designed 50 years ago as a stopgap measure that would ultimately discourage construction in flood zones—has evolved into a system that encourages and enables development in places most at risk. There isn’t much political sentiment to change that, and as long as that’s the case, the clash of wind-versus-water always remains right around the corner.