Best’s Market Segment Report: NFIP Adrift but Growing Private Flood Insurers Gain Traction

While the final damage tally from Hurricane Ian may take years to fully develop, at least one early industry estimate places flood-related losses on par with Superstorm Sandy in 2012, potentially making it one of the largest single flooding events to occur under the National Flood Insurance Plan (NFIP), according to an AM Best report.

The new Best’s Special Report, titled, “NFIP Adrift but Private Flood Insurance Gains Traction,” states that just 30% of Florida residents have insurance through NFIP, down from 41% when Hurricane Irma struck the Sunshine State in 2017. However, private carriers increased their total flood insurance premiums by over 40% to surpass the $1 billion mark in 2021; although, at year-end, it was still only one-third the size of the federal flood insurance market.

That shift preceded Hurricane Ian, a catastrophe event that FEMA estimates will cause in excess of $3.5 billion in flood losses for the NFIP. It also followed the implementation of a new rate system for NFIP coverage, which is intended to make the federally funded backstop more financially stable by charging more adequate premiums for each individual risk.

“Risk Rating 2.0, as it is known, would also make private flood insurers more competitive in their pricing, and potentially shift the related exposure to the private sector,” said Christopher Graham, senior industry analyst, AM Best. “In one respect, Hurricane Katrina really exposed the inadequacy of the NFIP’s flood insurance rates.”

Following that 2005 event, the NFIP had to borrow almost $17 billion to pay losses related to an extremely difficult hurricane season, which included Hurricanes Rita and Wilma. The NFIP’s total debt reached $36.5 billion in 2018, before Congress canceled a $16 billion portion, resulting in its current level of $20.5 billion. That debt level, combined with growing coastal exposure, have underscored the need for a solution that will entice more carriers to write private flood insurance.

Given its more than 1,300 miles of coastline, Florida is unsurprisingly the largest market for flood premium, both private and federal combined, with over a quarter of all U.S. flood coverage written there. However, the report notes that California ranks among the top six states for flood insurance premium, which is due more to the size of the state than the risk of flood losses.

California also serves as an example of what could happen when NFIP rates are in line with the true actuarial risk price. With the risk of flood loss being lower—there is much less risk of storm surge in California than in any of the Atlantic or Gulf states—the true risk rate is already closer to the NFIP price and, accordingly, private insurers are much more active. Private flood insurance accounts for about 40% of all flood insurance in California; in Florida, private flood insurance is just 15% of the total flood insurance premium.

“Fewer areas in California are in flood zones compared to Florida, so private insurers may surmise that California presents more profit potential to underwrite flood coverage than Florida properties,” Graham said.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=325977.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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