According to the National Oceanic and Atmospheric Administration (NOAA), flooding occurs everywhere and is a threat to any area that receives rain. Federal Emergency Management Agency (FEMA) data reveals that 99% of U.S. counties were impacted by flooding between 1996-2019.
Damages caused by flood incidents often prove to be very costly. Just one inch of floodwater can cause up to $25,000 in damage. To help mitigate flood risk and subsidize the cost of flood insurance, the National Flood Insurance Program (NFIP) managed by FEMA was created in 1968. Today, the NFIP has more than 5 million policies across over 22,000 communities.
While the NFIP is a primary source of flood insurance for residential properties in the U.S., recent changes to the program could generate growth in the private flood insurance market.
One of the most significant changes is a new pricing methodology recently called Risk Rating 2.0. Risk Rating 2.0 is designed to calculate premiums more equitably across all policyholders and deliver rates that are actuarially sound—based on home values and an individual property's flood risk—and easier to understand. A pricing structure like this that is more aligned with risk means that some NFIP policyholders will see an increase in premiums. It also opens the door to more private insurer participation in the flood insurance market. As these actuarial premiums are phased in, private insurers will be able to compete on a more level playing field in this market.
Best's Market Segment Report titled Appetite for Flood Risk Among Private Insurers Still Small noted that, "The U.S flood insurance market is slowly transitioning toward private insurers playing a much needed and more prominent role by providing additional competitive market options for those seeking coverage." According to the report, private flood insurers generated nearly $3.1 billion in total direct premium from 2016-2020. During that period, 2020 saw the largest amount in direct premium at $735 million. A recent Best's Ranking report found that the U.S. private flood insurance industry's direct premiums written increased 42.9% in 2021.
Continuing advances in data and analytics are making it possible to predict flood risk and price exposure more accurately. These advances are generating increased interest in covering flood risk from private insurers and encouraging more to enter the market.
The development of the private flood insurance market means more options for consumers and potentially lower premiums. A report by the Congressional Research Service titled Private Flood Insurance and the National Flood Insurance Program highlighted that private insurers may "be able to offer premiums more closely tied to individual risks than the NFIP currently does, which would provide lower premiums for some policyholders."
Private insurers also can compete with the NFIP by offering a wider range of coverage options. Some of these options could include temporary living expenses such as meals and hotel stays and construction repairs not covered by the government program.
Another advantage of private flood insurance for consumers is the availability of higher coverage limits. Under the NFIP, the current maximum coverage limit for residential buildings is $250,000 and maximum personal property coverage of up to $100,000.
Private insurers also are leveraging technology to speed up the process of quoting, pricing, and approving flood insurance coverage. For example, technology that measures the elevation of structures makes it possible to issue a policy without requiring an elevation certificate.
Today, consumers applying for a policy through the NFIP must wait 30 days for coverage to be approved and for their policy to take effect. This does not have to be the case for private insurers, which can offer coverage sooner and allow digital monthly payments rather than requiring payment in full upfront.
With the help of technology, private insurers also are better able to customize coverage to client needs and simplify the claims process. This improved customer service and increased convenience is appealing to policyholders, particularly millennials and Gen Zers as they enter the market.
As NFIP pricing becomes more accurately aligned with its risk exposure, the market for private flood insurance will grow. This will offer more coverage options for consumers facing increased flooding risk from more frequent and severe weather events.
