The Takeaways:
- Water causes far more human injuries and property damage than file.
- Only 1 in 6 homes in the United States is insured against flood. Yet 90 percent of natural catastrophes in the country involve flooding.
- The private flood insurance market is slowly but surely growing.
- More people and families moved to hurricane- and flood-prone areas in Florida and Texas, as well as parts of California, Nevada, and Washington.
- Many people incorrectly assume homeowners insurance covers flood damage or believe they only need flood insurance if their mortgage lender requires it.
- The biggest advantage of private flood insurance is extended coverage for flexible policies,
Bad News Related to Water Damages
We humans have more troubles with water than with fire in the past, and will be more so in the future.
Don’t take my words for it. According to this article, “Floods caused an estimated $76 billion in global damages in 2020 and constitute nearly two-thirds of all presidential declared disasters in the United States. It is anticipated that by 2050, national scale high tide flooding will occur an average of 45-70 days per year. These long-term forecasts are expected due to an average sea level rise of around a foot in the U.S, according to the National Oceanic and Atmospheric Administration (NOAA).”
“While it may be unclear if the physics of flooding is changing from climate change,” the paper says, “there is a clear case that the economic costs of flooding are trending up.”
This article of Triple-I lists the major catastrophes in 2022 of the US, it clearly shows that catastrophes involving water outnumber fire related catastrophes. In other words, we have seen far more “wet” disasters than “dry” ones.
For example, we have 3 tropical cyclones, 62 severe convective storms, 13 winter storms, 15 floodings, adding to a total of 93. Meanwhile, there were 26 wildfires, drought & heatwaves, only about 25% of the water related incidences. In terms of fatalities, the total human toll of water related catastrophes (401) was more than 6 times than that caused by wildfires (65). In terms of economic losses, water related catastrophes ($146+ billion) are more than 8 times higher than wildfires ($18 billion). Finally, water related insured loss in 2022 was $89.9 billion), more than 10 times higher than wildfire related insured loss ($8.9 billion).
Natural Disasters & Social Changes
The first thing to be noticed is that until not long ago, governmental program is the only option for flood insurance, as few private flood insurance is available. Flood was long considered an untouchable risk for private insurers. For decades, FEMA’s (Federal Emergency Management Agency) National Flood Insurance Program (NFIP) was practically the only available option. Before NFIP, “mitigation” meant building more dams and providing post-event recovery assistance.
From this issue briefing by the Triple-I, “The human and economic tolls associated with flooding can be massive. It can take families, businesses, and communities years to recover from a single event. And – until recently – insuring these risks and the cost of helping communities recover fell almost entirely on government programs.”
The second social change is related to where people want to live.
“Losses are on the rise, due to weather and demographic trends: More people are moving into areas most vulnerable to weather and climate-related risks. Since 1940, the number of housing units in the United States has increased most dramatically in hurricane- and flood-prone areas in Florida and Texas, as well as parts of California, Nevada, and Washington that are at an elevated risk of wildfire or drought — and, consequently, mudslides and flash floods.”
The third fact is the low awareness about flood insurance. Many people incorrectly assume homeowners insurance covers flood damage or believe they only need flood insurance if their mortgage lender requires it.
Also low insurance coverage: Only 1 in 6 homes in the United States is insured against flood. Yet 90 percent of natural catastrophes in the country involve flooding.
Meanwhile, financial loss associated with flood is huge. One inch of flood water can cause as much as $25,000 in damage to a home. Between 2010 and 2 018 the annual cost of flood damage was about $17 billion in the United States. This is four times the approximately $4 billion per year recorded in the 1980s.
The financial consequences are real. According to this report on February 27, “Dozens of families displaced by Hurricane Ida now have until Tuesday to move out of a Lower Manhattan hotel.”
A FEMA program paid for the temporary housing until federal aid ended in December.
“I get up to get something to drink and stepped into water up to my knees,” Wilson said recalling the night of the storm.
Wilson isn’t alone, roughly 380 families needed emergency shelter after the storm.
FEMA and the city paid a $1.4 million contract that allowed displaced families to stay at the hotel, but that contract expired at the end of February.
Changes on the way
Improved data, analysis, and modeling have helped drive increased private-sector interest in flood-risk transfer and mitigation. Since 2016 NFIP has been using reinsurance protection. NFIP purchased $1.15 billion in coverage from 32 private reinsurers in 2021, up from 27 in 2020.
Having more reinsurers can provide greater capacity and diversification for the primary insurer, which can reduce their exposure to risk and potential losses. More reinsurers can also provide access to a wider range of products and services, and create more competition in the market, which can drive down prices and improve terms for the primary insurer.
Opening Up Private Flood Insurance Market
On the demand side, in 2019, federal regulators allowed mortgage lenders to accept private homeowners flood insurance if the policies abide by regulatory definitions. Even if private insurance policies do not meet regulations, if insurers provide adequate protection according to general safety and soundness requirements. This is likely to impact homeowners in states where most of the nation’s flood insurance policies are held.
The increase in private coverage helps spread the economic risk related to flooding. In terms of coverage: Private flood insurance policies may offer more extensive coverage options than the NFIP policies. Furthermore, private insurers also may offer coverage for basements, detached structures , and additional living expenses, which are not typically covered by the NFIP. Private insurers may also offer higher coverage limits than the NFIP.
In terms of cost: Private flood insurance may cost less or more than the NFIP, depending on various factors such as location, flood risk, and coverage options. Private insurers may offer discounts for mitigation measures like elevated home or installing flood-resistant materials. The NFIP premiums are set by the federal government and are based on the property’s flood risk zone, year of construction, and occupancy type.
In terms of availability: Private flood insurance policies may not be available in all areas, and some areas may have limited options. The NFIP is available in most communities that participate in the program, although some high-risk areas may have limited coverage options.
The NFIP may offer some advantages such as lower rates in certain areas and guaranteed coverage for eligible properties, while private insurers may offer more flexible coverage options and potentially better customer service.
Private flood includes both commercial and private residential coverage, primarily first-dollar standalone policies (i.e., providing coverage from the first dollar of loss, without requiring the policyholder to pay a deductible or self-insured retention before the insurance coverage begins) that cover the flood peril and excess flood. Excludes sewer/water backup and the crop flood peril. Does not include FM Global, which is a mutual insurance company that specializes in property insurance, loss prevention engineering, and risk management services. It was founded in 1835 as the “Factory Mutual Fire Insurance Company” and has since become one of the largest commercial and industrial property insurers in the world.
In 2021, FEMA unveiled details of Risk Rating 2.0 – its plan to modernize NFIP to make it fairer and more sustainable. The changes measure flood danger differently – gauging properties’ specific risks and replacement costs, rather than simply whether they sit in a FEMA-designated “flood zone.” FEMA officials said this would end a system in which low-value homes effectively subsidize insurance for high-value homes. FEMA also launched its National Risk Index for natural hazards. The online mapping application identifies communities most at risk for 18 types of events. It visualizes the risk metrics and includes data about expected annual losses, social vulnerabilities, and community resilience.
