This article was originally published in Independent Agent magazine.
Although flood insurance is in for a blissfully quiet April with few major NFIP changes, the program is set to expire in just six months.
What’s next for flood insurance beyond the short-term reauthorization timeframe? As massive debt continues to loom heavy over the NFIP, a swell of private markets is targeting flood business—and sophisticated mapping technology continues to make it easier for the entire insurance industry to get its arms around flood risk.
“For the first time, I can really say the industry has a lot of innovation that’s going on,” says Keith Brown, CEO of Aon National Flood Services. “The tools out there to evaluate risk, private products, the NFIFP itself—we’re looking at an exciting time for flood insurance.”
In 2016, five flood-related events exceeded $1 billion in losses each, according to CoreLogic’s Natural Hazard Risk Summary and Analysis—and despite another relatively light year for large catastrophes, last year’s flood losses totaled $17 billion, which is six times greater than overall flood damage in 2015.
“Given the increase in the flood losses we’re seeing, the NFIP is not sustainable in its current state,” says Howard Botts, chief scientist at CoreLogic. “We’re seeing a tremendous push in every discussion we’ve had to try to push more and more of the flood risk back into the private insurance market.”
Brown adds that flood insurance has only 4-6% penetration among homes that purchase homeowners coverage, when “really it should probably be more like 15-20%,” he says. “It’s a big growth market all the way across the board, and private insurers are starting to really look at this as a greenfield space where they haven’t looked at in that way before.”
As the NFIP has been forced to raise premiums and tack on fees, “it makes the price point so high that private options out there are in many cases better and cheaper, and easier too because they don’t have as many hoops to go through,” Brown explains. “There are more and more private product offerings out there, and it’s only going to get more and more diverse in the coming years.”
But what happens to the NFIP if policyholders begin to swarm the private marketplace? “There are those who are concerned that a strong private market cannibalizes the NFIP,” Brown says.
“The NFIP itself helps fund the mapping program, helps fund some of the operations aspects of the program and some of the grants,” agrees Bruce Bender, specialist in outreach and risk communication services and a national consultant for FEMA’s Risk MAP effort and recent FloodSmart marketing campaign. “The private market right now uses FEMA maps and NFIP rates. If you take that away, if the NFIP shrinks, you’re making a direct impact on all of that.”
Bender says some organizations, such as the Association of State Floodplain Managers, are trying to figure out whether it’s possible to assess a fee on a private policy “to help continue to fund all of those things.” But the elephant in the room is whether the private market will cherry pick lower-risk properties, leaving the “worst of the worst” to the NFIP. Bender raises the question: “Does Congress want the NFIP to become a market of last choice? If so, you’re going to have really high rates in the NFIP.”
But with a “flurry” of private product releases in just the past two years—most of which provide discounted NFIP rates and do not include any extra policy fees beyond those for excess & surplus lines—comes a number of private insurers who are going after higher-risk zones or even negatively rated buildings, Bender says: “So the worry was that the private market would target the low fruit, but now we’re seeing otherwise.”
Why? How? “The way the available capital is in the space right now, private markets are willing to get into some of the higher-risk areas,” Brown explains.
And that means opportunity will be abundant if agents decide to start offering private market options to flood insurance prospects and clients. “We’ll have to stay tuned to see what the September reauthorization’s going to look like,” Botts says. “But I think there will be more and more opportunities for independent agents towrite it in the future as we move into a new world of flood insurance.”
Read the rest of the article at Independent Agent magazine.