Are Private Insurers Ready to Take on the U.S. Flood Problem?

Contributor: Justin Smith, Chief Underwriting Officer | Applied Underwriters | Silver NetVU Corporate Partner | Posted 06/07/2022

Floods account for eight of the ten most damaging natural disasters in the U.S. Only about 12% of U.S. homeowners purchase flood insurance, and most obtain it through the National Flood Insurance Program (NFIP). The resulting gap in protection could be as much as a $40 billion opportunity for private insurers.

Enacted by Congress in 1968, the NFIP was the government’s response to the lack of availability of private insurance and the rising cost of disaster assistance due to floods. Floods were considered an “uninsurable risk” at the time, and the Federal Emergency Management Administration (FEMA) took over the management of NFIP and built into it three components: providing flood insurance, improving floodplain management and developing maps of flood hazard zones, known as Flood Insurance Rate Map (FIRM).

For the past 40 years, FEMA’s primary tool for managing and pricing flood risk are the maps
they develop. Private carriers see problems in using these maps to calculate the exposure and the aggregation risk, as many of the maps are outdated and frequent flooding exists outside designated flood zones. Additionally, the maps rely on historical statistical techniques that don’t include a risk accumulation metric.

Hurricane Harvey that hit Texas in 2017, was a lesson in the limitations of flood mapping.
Seventy-five percent of the claims from Harvey were outside Special Flood Hazard Area (SFHA), which are high-risk areas defined by FIRMs as land that would be inundated by a flood having a one-percent chance of occurring in any given year.
Since Harvey, underwriters have developed a better understanding of the physics of flooding, and new, more powerful tools provide a more realistic view of the risk. Innovative models are changing our understanding of how water flows over floodplains. For example, when water flows over a levee or riverbank, it fans out in multiple directions, making those floodwaters largely unpredictable using traditional models. Today, high resolution typography satellite data and land use information can give a more accurate picture of where and how flooding can occur.

The fact that all 50 states have experienced floods in the past five years—with so few
homeowners covered by insurance—creates an urgent situation. But will homeowners
purchase it willingly? The answer to this question and exactly what private participation in the flood insurance market will look like remain to be seen. Technology in the hands of
underwriters who understand flood risk and can work effectively with the government and the public to help mitigate the risk seems to be a promising solution.

Applied Underwriters® designs financial services and workers' compensation solutions to meet the real needs of small and mid-sized businesses nationwide. With insurance carriers rated 'A' (Excellent) by AM Best Company, we offer rock-solid workers' compensation coverage along with some of the hardest-working products and services available on the market today.