The Move to a Private U.S. Flood Insurance Market

Continued concern with the viability of the National Flood Insurance Program (NFIP) has led to growing interest in a private flood insurance market.

For the first time last year, the Federal Emergency Management Agency (FEMA) entered into a reinsurance agreement with 25 reinsurance companies, transferring over $1 billion of the program’s risk to the private sector.

There are concerns that the public program set up in 1968 to provide consumers and businesses a way to insure properties against flood is now in serious debt, said Marc Treacy, managing director of flood insurance at ISO, a Verisk business.

Recently, the NFIP reported that it paid out over $8 billion dollars in flood insurance claims related to 2017 disasters.

In an interview with Claims Journal, Treacy explained how and why private flood insurance must evolve and shared characteristics for private flood insurance to succeed.

Private market flood insurance makes sense, he said, because insurers have experience responding to catastrophes, understand the current needs of clients and the market as a whole and can update programs as needed.

For private flood insurance to succeed, he said there needs to be clarity for lending institutions.

He referenced the 21st Century Flood Reform Act, currently awaiting action by the Senate, which would provide confirmation that private market flood insurance does meet flood insurance federal regulations.

In addition, because the federal program has been around so long, state regulators need to recognize their role in the flood insurance marketplace.

In order to structure a flood insurance program, insurers need to develop coverage forms and determine pricing based on loss costs, as well as needs for cost of capital.

Lastly, there’s a need to educate consumers and businesses.

“Many people today believe, since the government has told them through federal regulations, that they only have to have flood insurance in the traditional 100-year flood plain, that if you’re outside that area there’s no exposure to flooding, you don’t need flood insurance,” said Treacy. “I can pick out numbers of events in the past five years that really shows that’s an outdated way of thinking because most of those losses are happening outside of the 100-year flood plain.”

Everyone needs to realize there’s always an exposure for flood, he added.

ISO recently introduced a new program for insuring flood risks. Its personal lines flood program allows insurers entering the private flood insurance market to offer flexible coverage options in a template much like a standard homeowners’ policy.

ISO began the state-by-state filing process for its new personal lines flood program in December 2017 and will continue throughout 2018. Its commercial lines flood program was launched in the summer of 2017.