Flooding continues to be the most expensive and the most common natural disaster in the United States, resulting in billions in economic losses every year. According to the National Flood Insurance Program (NFIP), 90% percent of all U.S. natural disasters involve flooding.
In October 2021, the NFIP implemented its Risk Rating 2.0 program, one of the most significant changes from a rate modeling and underwriting standpoint in more than 50 years. In the past, FEMA flood zones and rates were much more generalized. However, the NFIP is striving to implement advanced technology and geocoding to more accurately rate flood risks. While these changes are vital to keeping the NFIP afloat, significant premium increases are coming because many policies have been severely underpriced for years. As the NFIP continues to evolve, retail agents face a prime opportunity to protect clients against the economic impact of flood damage with private insurance options.
NFIP CHANGES INSPIRE PRIVATE MARKET INTEREST
Under the NFIP's newly implemented rating program, the annual premium is expected to drop for approximately 25% of policyholders. However, many others will likely see their rates increase over time, reaching their full risk rate in about five years. Homeowners currently paying $900 a year for an NFIP policy could see that cost more than triple to around $3,500, while those properties in high-risk zones could see prices as high as $8,000 annually.4 It's anticipated that the majority of higher NFIP rates will hit the coastal states of California, Delaware, Florida, South Carolina, and Washington the hardest. As the nation adapts to warmer oceans and continuing climate change, other states, including Louisiana, Mississippi, and Texas, are also likely to face more significant losses and higher premiums due to historical data and increased storm activity in those areas.4
As NFIP premiums rise, the U.S. flood insurance market is beginning to turn toward private carriers offering additional options for those seeking coverage outside the federal program. This transition toward the private sector is coming just after the NFIP reported a $20.5 billion shortfall in 2021, a figure that includes losses dating as far back as Hurricane Katrina in 2005.1
Eventually, the new rating system should lead to adequately priced NFIP risks and a more stable future for the NFIP. These changes also give private insurers a competitive edge because the private flood market is not expecting significant rate changes. While some private insurers are often more selective, avoiding risks in flood-prone areas and focusing more on commercial properties than individual homeowners, carriers are generally pursuing more preferred risks and using geocoding technology to rigorously analyze individual exposures.1
If rating technology generates a poor score, a property has a history of flooding, or an area is negatively elevated, the premium will be higher as rates are assessed more precisely. In addition, underwriters are now working to ensure that properties are more thoroughly appraised, considering the likelihood of extreme weather damage. Uncertain about growing inflation, supply chain obstacles, or potential labor shortages, underwriters are also scrutinizing property values more closely to confirm insured to value in light of rising reconstruction costs.
PRIVATE FLOOD MARKET REMAINS STABLE & COMPETITIVE
As the NFIP rate changes take hold and clients grapple with the growing prevalence of catastrophic natural disasters, carriers are reporting a significant uptick in activity around flood insurance. Private markets also see greater competition than ever before as new programs continue to emerge. More markets are available now than there were five years ago, which is working to stabilize rates. Pricing remains competitive as carriers work to provide the broadest possible coverage at a reasonable rate. However, premiums can vary significantly depending on an individual property's location and status. Along the coast, flood insurance will continue to be more expensive, and repeat flood areas often see higher prices as underwriting continues to rate properties based on loss experience.
The terms and conditions of private flood coverage remain similar to those of the NFIP, but the private market offers additional advantages for policyholders. Residential coverage through the NFIP maxes out at $250K, but private policies can often offer limits up to $2M as well as replacement costs on the structure and contents. In addition, the NFIP requires a 30-day waiting period, while private options typically don't include one.
Many agents are hesitant to tap into the flood insurance market because they don't consider themselves knowledgeable enough about flood risks or are concerned about the amount of time and information needed to obtain a quote. However, markets across the board are striving to differentiate themselves by employing innovative rating technology that can more accurately price coverage based on a variety of flood risk factors. This new technology makes obtaining a quote quick and straightforward. Options are typically user-friendly, require minimal expertise, and provide an accurate quote in just a few minutes.
NOW IS THE TIME TO PURCHASE FLOOD INSURANCE
U.S. businesses and local communities face greater uncertainty and unpredictability regarding the impact of flooding than they may realize. Before 2020, surveys found that 12% - 14% of American homeowners reported having a flood insurance policy. In 2020, 27% of all U.S. homeowners reported having flood insurance; however, on average, only 30% of homes at the highest risk have flood coverage.3 While FEMA's Individuals and Households Program (IHP) does exist to provide financial assistance to eligible households that are underinsured or uninsured, aid isn't always available for flooding. And, even if it is available, the assistance is often provided in the form of a loan and doesn't come close to covering flood damage costs. FEMA's average disaster assistance grant totals around $5,000 per household. In comparison, the average flood claim costs more than $90,000.6
While most homeowners remain uninsured, heavy precipitation weather events leading to flash flooding have increased over several years. In the U.S., extreme rain has begun occurring more frequently across an expanding land area.5 FEMA reports that more than 20% of NFIP flood insurance claims now come from outside of high-risk flood areas.4 Over the next 4 - 5 years, that number is expected to rise. As populated areas grow and more concrete covers the landscape, it's harder for land to absorb heavy rainfall, resulting in more inland flooding than ever before.
These changing weather patterns increase flood risks for homes and businesses outside traditional flood risk zones. That fact, combined with NFIP rating changes, makes 2022 – 2023 one of the most favorable times in more than a decade to purchase private flood coverage. When generating an online quote, data around a few key factors such as elevation of the property, local flood history, distance to a large body of water, and level of annual precipitation in a specific area will influence the cost of available coverage.
Just one inch of water can cause $25,000 in damage to a property, wiping out a family's personal savings or having devastating effects on a business's ability to operate.6 As extreme weather events occur more frequently, the flood insurance picture changes. Utilizing modeling and historical data to determine a property's flood risk can help ensure that homes and businesses have appropriate flood insurance in place should the unexpected occur.2
With state-of-the-art proprietary technology and unique offerings, CRC's flood program is one of the best in the country. Over the last five years, it has delivered consistent, stable results making it a strong core option outside the NFIP. It's straightforward to navigate and leverages both available data and modeling technology to provide quotes from multiple carriers with only one submission. Contact your CRC Group producer today to discuss how we can help protect your clients against the devastating impacts of flood damage.
- Ben Tschepikow is a Broker with Argenia, a CRC Group Company located in Little Rock, AR, and is a member of the Personal Lines Practice Advisory Committee.
- Private Flood Insurance Market Small but May Grow with New NFIP Rating: AM Best, Insurance Journal, September 23,2021. https://www.insurancejournal.com/news/national/2021/09/23/633462.htm
- Businesses Can Expect to Spend $13.5 Billion on Repairs Due to Flooding in 2022, Insurance Journal, December 28, 2021. https://www.insurancejournal.com/news/national/2021/12/28/645750.htm
- Spotlight On: Flood Insurance, Insurance Information Institute, November 30, 2021. https://www.iii.org/article/spotlight-on-flood-insurance
- FEMA'S Upcoming Changes Could Cause Flood Insurance to Soar at the Shore, Forbes Advisor, March 18, 2021. https://www.forbes.com/advisor/homeowners-insurance/new-fema-flood-insurance-rates/
- Climate-Change Report Points to Rise of Flash Flooding, The Wall Street Journal, August 10, 2021. https://www.wsj.com/articles/climate-change-report-points-to-rise-of-flash-flooding-11628609644
- Your Client's Flood Risk is Changing: From High-Risk to Low-to Moderate-Risk, FEMA. https://www.fema.gov/sites/default/files/2020-05/FEMA_Floodsmart_AgentCommsFS3_High-LowMod_2019_PRP.pdf