The Private Sector Is Returning to the Flood Insurance Game
The private sector is returning to the risky world of insuring homes against flood damage, offering hope that the paltry percentage of homeowners with flood insurance will rise out of the single digits.
The growth is being triggered by federal policies, new technology that lets insurance companies assess a property‘s flood risk and investors who have poured huge amounts of cash into insurance companies, prompting their expansion into new markets.
The National Flood Insurance Program continues to dominate the market, though. Private insurers provides less than 5 percent of residential flood policies, according to a recent study.
But the private sector has recently seen sharp growth, which raises both the promise of expanded flood coverage and the fear that companies will sell inexpensive policies that do not help homeowners rebuild destroyed homes, leaving them reliant on federal disaster aid.
“We‘re all trying to accomplish more coverage. There‘s no question that recovery is much faster on a structure that‘s insured than on a structure that‘s not insured,” said Christopher Heidrick, chairman of the flood insurance task force of the Independent Insurance Agents & Brokers of America.
Financial regulators took a major step last month toward stimulating private flood coverage with a new rule that requires mortgage lenders to accept private flood policies just as they have long accepted the NFIP policies for federally backed loans that require flood insurance. The rule, issued in response to a 2012 flood insurance law, seeks to remove a barrier to insurance companies writing flood policies.
But the rule is also raising concerns that it will let private insurers write low-cost policies that appeal to homeowners yet have high deductibles and coverage limitations that make them useless to policyholders whose homes need to be rebuilt after a flood. Federal flood policies have deductibles of $1,000 or $1,250, depending on the amount of coverage. The policies also pay to elevate or flood-proof rebuilt homes, which can cost tens of thousands of dollars.
“Knowing that consumers typically buy the cheapest alternative, we have to question whether [the rule] will usher in flood policies with high deductibles to the point that the consumer can‘t really file a claim,” said Chad Berginnis, executive director of the Association of State Floodplain Managers.
The 2012 law sought to expand private flood insurance while ensuring it provides robust coverage similar to federal policies, Berginnis said. Lawmakers want flood insurance to be substantial enough to cover major repairs and rebuilding so that homeowners don‘t turn to federal disaster relief, which cost the government $120 billion in 2017, Berginnis added.
“Congress wanted to make sure that the growth in the private market was done in an orderly fashion and that consumers were protected,” Berginnis said.
Others are pushing Congress to tweak federal law to remove what they say are additional barriers that discourage private companies from writing flood policies and give the NFIP a competitive advantage.
“Private businesses have no interest in trying to compete with a government-run entity that is charging premiums that are below cost,” said Heidrick, the insurance agents‘ official.
The Federal Emergency Management Agency, which runs the NFIP, says private insurance is an important element to its goal of doubling the number of homes with flood coverage by 2023. The NFIP covers 5.1 million homes, almost entirely in coastal areas, and has been the nation‘s dominant flood insurer for decades. Private insurers have avoided covering flood damage because it is too unpredictable and potentially catastrophic.
But that has changed in recent years as technology has enabled risk-modeling companies to assess the risk of individual properties, which lets insurance companies write policies, said R.J. Lehmann of the libertarian R Street Institute think tank in Washington, D.C.
“The market is growing largely because [insurance] companies are becoming more comfortable with the risk,” Lehmann said.
In addition, large investors such as pension funds have poured money into insurance and reinsurance companies to diversify their investments. The insurers are using the money to expand into new areas of coverage, Lehmann said. “They feel like this is a good risk,” he said of flood coverage.
A study in July 2018 by the influential University of Pennsylvania‘s Wharton Risk Management and Decision Process Center said that private insurers write 3.5 percent to 4.5 percent of residential flood policies. Other reports show private insurance coverage grew by 50 percent from 2016 to 2017, Lehmann said.
But the Penn study says it‘s impossible to know whether private insurers are attracting customers who haven‘t had flood coverage or are pulling policyholders away from the NFIP. The issue is important to lawmakers and FEMA officials who want more homeowners to have flood insurance, particularly those who live outside of high-risk areas and who are not required to have flood insurance.
Many recent floods have hit non-coastal areas where flood risk is considered low and coverage is not required, according to a recent report by the Congressional Research Service. The report noted that homeowners with flood insurance can get coverage worth up to $350,000 while those without coverage can get only up to $34,000 in disaster aid.
Although lawmakers have tried to pass laws in recent years to induce more private insurers to cover flood risk, those efforts are unlikely to gain traction in 2019-20, according to Berginnis of the floodplain managers group. Heidrick and Lehmann agreed.
“I think they will leave well enough alone, and that might be for the best,” Lehmann said.
Reprinted from Climatewire with permission from E&E News. E&E provides daily coverage of essential energy and environmental news at www.eenews.net.