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.
Milliman has announced the results of a first-of-its-kind study to assess the feasibility of a private flood insurance market in several key states across the United States. The study, which was conducted in collaboration with risk modeling firm KatRisk, set out to model private flood insurance risk and potential premiums for all single-family homes in Florida, Louisiana, and Texas—which combined account for 56% of National Flood Insurance Program (NFIP) policies in-force nationwide. The study includes all single-family homes in those states, not only those who are currently purchasing flood insurance from the NFIP, and the modeled NFIP premiums do not include the effects of grandfathering. The estimated private insurance premiums were developed using reasonable assumptions selected by Milliman.
Key findings include:
• For all single-family homes, 77% in Florida, 69% in Louisiana, and 92% in Texas could see cheaper premiums with private insurance than with the NFIP.
• In Florida, 44% of homes modeled could see premiums less than one-fifth that of the NFIP, while the same holds true for 42% of homes in Louisiana and 70% of homes in Texas.
• Conversely, private insurance would cost at least double the NFIP premium for 14% of single-family homes in Florida, 21% in Louisiana, and 5% in Texas.
• Across Special Flood Hazard Areas (SFHAs)—the high-risk zones in which flood insurance is mandatory—private insurance could offer cheaper premiums than the NFIP for 49% of single-family homes in Florida, 65% in Louisiana, and 77% in Texas.
The catastrophic rainstorms in Louisiana in 2016 are one example of the devastating financial effect flood can have on communities outside mandatory purchase areas. “A thriving private insurance market would provide wider and in many cases less expensive options that could protect more U.S. consumers, expand the awareness of the need for flood insurance, and spread the risk beyond the NFIP,” the report says.
To view the complete report including additional findings and critical assumptions, click here.