Tag Archives: homeowners insurance

Report quantifies flood risk for residential properties in the U.S.

Despite recent efforts to reform the National Flood Insurance Program (NFIP), most U.S. homeowners do not carry insurance to protect their properties against the risk of flooding. For most homeowners, the purchase of this coverage is mandatory only if they live in certain specified high-risk areas. However, significant risk exists in areas where the purchase of flood insurance is rare. Even in areas where flood coverage is required, data from the NFIP and private flood insurers do not indicate high degrees of coverage. 

Beyond direct damages to property and communities, the flood insurance protection gap could have many downstream financial impacts. Homeowners insurance is integral to protecting the collateral that underpins the U.S. mortgage system. As a result, coverage gaps could create adverse financial exposure to bearers of mortgage risk including mortgagees, insurers, reinsurers, federal underwriting agencies, and bondholders. 

In a new Society of Actuaries report, professionals from Milliman and catastrophe modeling firm KatRisk examine the countrywide residential exposure to flooding and downstream implications including its impact on mortgage default risk. They also consider how flooding may be affected by rising sea levels and evaluate how it could affect the financial health of residential householders.

Record-setting wildfires put homeowners insurance in jeopardy

As the 2020 wildfire season again exceeds historical norms, insurers and policymakers must turn their attention from the literal fires to the figurative one: the threat—and increasing likelihood—that this escalating wildfire risk will result in a homeowners insurance crisis in the state of California.

For homeowners, insurance is often the last line of defense against losing everything to wildfire. However, for many, this crucial financial backstop is rapidly becoming harder to obtain as insurers reduce their portfolios due to billions in losses and regulatory restrictions on reflecting the true cost of risk in the premiums charged. This withdrawal is creating an untenable situation for many Californians and efforts to address it are becoming an urgent priority for policy makers.

In this article, Milliman professionals explain in more detail the state of home insurance in California and the regulatory efforts to address the issues thus far.

Insurance options needed due to a lack of wildfire coverage

Reinsurance helps insurers respond financially to large catastrophes like a wildfire or earthquake. Insurers share a portion of the premium with reinsurers to rent capital and reduce the burden of a major event involving multiple policyholders.

In California, regulations allow reinsurance costs for earthquakes to be included in insurance rates but not for wildfires or other catastrophes. This penalizes insurance companies that spread the risk of major wildfires, and results in bottom-line loss and expense outstripping premium over the long term. This, and other issues, are making it more complicated for homeowners in the state to find insurance with wildfire protection in the voluntary market.

How can insurance be restructured to solve the wildfire insurance availability issue in California? Milliman consultant Sheri Scott discusses some options in her article “Reshaping insurance to solve California’s wildfire insurance availability issue.”

CAT models could help insurers provide policies to more Californians

As a new wildfire season in California is ablaze, answers to questions about insurers’ pricing, underwriting, and exposure management functions resulting from the 2017 and 2018 seasons are still taking shape. According to Milliman estimates, the 2017 wildfire season alone wiped out just over 10 years of underwriting profits for California homeowners insurers. Moreover, the combined 2017 and 2018 wildfire seasons wiped out about twice the combined underwriting profits for the past 26 years, leaving the insurance industry with an aggregate underwriting loss of over $10 billion for the California homeowners line of business since 1991.

A historically profitable line of business has recently become an unprofitable line exposed to a severe peril that is neither easily measured nor fully understood. As a result, wildfire risk has become a key focus of Californians, and their property insurers.

Catastrophe simulation models, or “CAT models,” have been developed for a variety of catastrophic perils, such as hurricanes, floods, winter storms, earthquakes, and wildfires, to provide insurers with scientific techniques to quantify and assess their exposure to catastrophic risk. Recognizing the growing importance of this peril, a number of firms have been working to apply the latest techniques in catastrophe modeling to wildfires.

In their article “Wildfire catastrophe models could spark the changes California needs,” Milliman’s Eric Xu, Cody Webb, and David D. Evans explain how enhanced quantification and understanding of wildfire risk represents one of the most important challenges for property insurers writing business in the Western United States, and how innovations in the field of catastrophe modeling may assist them with this task. 

From nothing to something—the U.S. private flood insurance market thrives

Flood was a peril once thought to be uninsurable by the private insurance market. Today, the sector is poised to grow rapidly. Milliman consultants Nancy Watkins and Dave Evans are optimistic that private insurers will significantly close the U.S. flood “protection gap” in a few years by routinely offering flood coverage alongside most homeowners policies. In a recent Carrier Management article they authored, the consultants discussed trends in the private flood market leading to this prediction, and outlined several obstacles the market will need to overcome along the way.

To learn more about what flood insurance for U.S. homeowners could look like in a couple of decades, listen to the Critical Point episode entitled “The future of flood insurance.”

Critical Point focuses on the future of flood insurance

If you’ve watched the news recently, it will come as no surprise that flooding has become a major issue for communities across the United States. In this episode of Critical Point, Milliman consultants Nancy Watkins and John Rollins discuss the history and future of flood insurance. They also explore what flood coverage for homeowners could look like a few decades from now.

To listen to the entire podcast, click here.