Tag: Homeowner insurance

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Ways to Lower Insurance Premium During Inflation

The Takeaways:

  1. Inflation will always have an impact on insurance cost or premium because the labor and parts cost of repairment and replacement for damaged properties will be higher.
  2. Inflation increases the value of insured assets like homes, cars and personal property. As the value of these assets increases, the cost of insuring them also increases.
  3. Inflation also pushes up medical costs, which in turn increases health insurance as insurers must pay more to cover medical treatments, prescription drugs and other related costs.
  4. Inflation has another type: Social inflation that may directly push up insurance cost due to the legal fees and attorney activities encouraging lawsuits and compensation or indemnification of financial losses, leading to protracted litigation and higher claims costs.
  5. Homeowners and renters should review policies to avoid underinsured during inflation.
  6. Shopping around, bundling policies, increasing deductibles, reviewing your insurance policy periodically and maintaining good credit scores and keeping your mileages low, these can all help decrease insurance costs even during inflation.

Bad News on the Insurance Front

Are you feeling the pinch of rising insurance premiums? You’re not alone. Inflation has a significant impact on the cost of insurance, and unfortunately not everyone is well prepared when it comes to planning or budgeting their policies ahead of the time.

In this blog post, I’ll explore how inflation affects insurance, why it can make your coverage more expensive, and what you can do to mitigate its impact.

Let’s begin from auto insurance. This report tells us that a recent study by Bankrate found annual auto insurance premiums will go up by $101 in California, to an average of $2,291, roughly 2.81 percent of their income. Say an average Californian is making $3,500 a month, then since 2.81% of $3,500 is roughly $98 a month, an average Californian will pay $98 for auto insurance.

Insurance business is regulated by state; thus insurance rate also differs across states. However, we can always compare the spending of auto insurance as percentage of income. In this regard, California is ranked 32nd in the nation, where the lowest (rank 1st) is Maine and the highest (rank 50th) is New York.

Why Insurance Rate Is Higher During Inflation: Demand Side

Knowing insurance cost is higher does not tell us why it is so. The best way to know the reasons, like knowing most everything in the market, is to look at the demand side and the supply side, as together they jointly determine the price of auto insurance.

Normally the demand for auto insurance is measured by how many people will buy auto insurance. However, since auto insurance is required by the law, at least for the liability auto insurance, meaning when you hit someone and it’s your fault, you will have the money to pay for the medical bills for the victim, and money for fixing the car. In that sense, the number of auto insurance buyers stays the same as everyone is supposed to buy it — unless when we look at the number of people buying auto insurance above and beyond the basic liability insurance but also policies with collision and comprehensive coverage. We will talk about that in another time.  

There is another way to measure demand for auto insurance: How many people are filling insurance claim. Other things equal, more insurance claims mean more traffic accidents. In case you don’t know, an insurance claim is a formal request from the policyholder (i.e., anyone bought an auto insurance policy) to their insurance company asking for payment after a covered incident.

Turns out that this is a more interesting measure for demand, which varies from time to time rather than being fixed. If more drivers do not follow traffic rules, there will be more accidents, which in turn lead to more claims.

One important factor driving up insurance cost is the riskier driver behaviors after the pandemic. Auto premium rates are affected by frequency and severity of claims. After decades of decline, traffic deaths have increased in the past several years due to riskier driving behaviors — more speeding, driving under the influence, not wearing seat belts, distracted driving — during the pandemic.

It’s like we have waited long enough at home during the lockdown period that when we finally get a chance to hit the road, we all trying to release ourselves by driving faster.

Let’s look at the numbers from the highways: In 2021, U.S. traffic fatalities reached a 16-year high, with nearly 43,000 deaths. In the first quarter of 2022, the National Highway Traffic Safety Administration (NHTSA) estimates, 9,560 people died in motor vehicle crashes, up 7 percent from the same period in 2021, making it the deadliest first quarter since 2002.

It is a safe bet that reckless driving leads to more accidents, followed by more insurance claims, which drive up insurance cost. After all, insurers do not have the magic power to keep the insurance premium the same regardless of how many claims they received. Remember several insurers became insolvent after Hurricane Ian in Florida? The truth is that when many insured file claims at the same time, insurers will have insufficient amount of fund to cover all the claims. They can do two things: raising premium and going to reinsurance for coverage.

Similar considerations come into play for homeowners insurance. Global economic losses from tornadoes, hurricanes, severe storms, wildfires, floods, and other natural disasters reached $270 billion in 2021, according to Swiss Re. Of those losses $111 billion were insured, Swiss Re says.

Much of this loss trend is due to people moving into risk-prone areas. More people, homes, businesses, and infrastructure means more costly damage when extreme events occur. More damage to insured properties means more and larger claims. An Aon analysis of U.S. Census Bureau data shows the number of housing units in the United States has increased most dramatically since 1940 in areas that are most vulnerable to weather and climate-related damage.

Why Insurance Rate Is Higher During Inflation: Supply Side

Now we must consider the supply side factors that also drive up insurance cost: the people and businesses whose jobs are to fix cars involved in accidents, care for drivers injured, and repair and recover properties lost or damaged.

Unless your car is “totaled” or deemed worthless for repairment, insurers will pay for your vehicle to be fixed. From the following Triple-I issue briefing on inflation and higher insurance premium:

As material and labor costs rise, the cost to repair and replace damaged homes and vehicles increases. If the original premium rates are too low to cover these increased costs, insurers would quickly exhaust the funds they set aside for the rainy days to ensure they can keep their promises to pay all claims. If their losses and expenses exceed their revenues by too much for too long, they risk insolvency — unless they have reinsurance or insurance for insurers.

Social Inflation: Definition and Cost

The other side of story is social inflation, which is the amount of insurance claims that above economic inflation. One narrow definition is “legislative and litigation developments which impact insurers’ legal liabilities and claims costs.”

ChatGPT offers a more detailed definition: “Social inflation is a term used to describe a phenomenon where the cost of insurance claims rises due to societal factors such as changing attitudes towards personal responsibility, increasing jury awards, and the growing willingness of juries to award large sums of money to plaintiffs. In other words, social inflation refers to the trend of increasing costs of insurance claims due to broader social, cultural, and economic factors rather than traditional factors such as inflation, interest rates, or market fluctuations. This trend has been observed in a variety of industries, including personal injury, product liability, and medical malpractice claims. Social inflation can have significant impacts on insurance companies and their policyholders, leading to higher premiums and reduced coverage options.”

Two things to be remembered about social inflation. First, it is social rather than economic, which means the cause of it is not economical but social, especially the legal part of society. Two, its impact is not to be underestimated.

In a recent report by Triple-I, it is found that “U.S. commercial auto insurance liability claim payouts increased $30 billion more than would otherwise have been expected between 2012 and 2021 due in part to social inflation.”

Inflation and Underinsured Homeowners

Inflation means lower purchasing power of the same amount of money. For example, $1 before inflation could buy you 4 eggs but only 3 after inflation. But the same logic can apply to buying insurance. The best example is from homeowner insurance. Before inflation your $1,500 premium homeowner policy could be enough to cover the cost needed for repairing a partly damaged house. However, after inflation everything (parts, labor) has a higher price, meaning your insurer will have a hard time to cover the cost of repairing the house to the original state.  

According to a report by policygenius.com in 2022, construction costs have risen sharply because of inflation, which means you may not have enough home insurance to rebuild your house after a disaster, which in turn means many homeowners could be left underinsured. 

During periods of rapid inflation, the cost to rebuild may suddenly spike to account for higher lumber prices or a shortage of contractors. If homeowners don’t update their policy to reflect these fluctuations, they may not have enough insurance to fully rebuild their home after a disaster.

The price of materials used in home construction has increased 36% since the start of the pandemic. As we settle into what forecasters predict will be another active hurricane and wildfire season, it’s more important than ever for homeowners to review their policy and make sure they have enough coverage should disaster strike.

From a recent survey of insured homeowners by policygenius.com:

  • More than half of homeowners (56%) did not review their home insurance policy in the last year to see how much coverage they had. 
  • Homeowners who reviewed their policy’s coverage limits in the last year (44%) were more likely than those who didn’t to:
    • Increase their home’s coverage limits.
    • Take action to lower their insurance premiums.
    • Have at least one coverage feature in their policy that accounts for high rebuild costs.
    • Be “very sure” their house is fully insured.
  • Just 9% of homeowners have increased their home’s coverage limit in the last year to account for rising construction costs and inflation.
  • Only 33% of homeowners are “very sure” their home’s coverage limit is high enough to cover their home’s entire rebuild cost.  
  • 83% of homeowners either don’t have or aren’t sure if they have inflation guard coverage, which is a crucial coverage feature that automatically increases your home’s coverage limit each year to keep pace with inflation. Notice this is an endorsement so it will cost you money to keep it. For example, say your home is insured for $100,000 and your inflation guard coverage is set at 8%. Now say you suffer a total loss of your home 90 days into your year-long policy term. Your dwelling coverage limit will be upped to reflect an 8% daily inflation rate, so your coverage limit would now be around $101,973, instead of $100,000. 
  • More than two in three homeowners (68%) may not have guaranteed replacement cost coverage, and 80% of homeowners may be without extended replacement cost coverage — two important coverage add-ons that buffer the impacts of demand surge and higher rebuild costs after a disaster. Note replacement cost is a basic type of insurance policy that pays for the cost of replacing or repairing a damaged property up to its current market value of materials and labor. This type of coverage does not take into account any increase in the cost of materials or labor that may occur in the future. Guaranteed replacement cost provides coverage for the full cost of replacing or repairing a damaged property, regardless of the current market value. This means that even if the cost of materials or labor increases in the future, the insurance company will still pay for the full cost of repairing or replacing the property.

Things to Do for Lowering Insurance Cost During Inflation

There are things you can do to lower or control your cost of insurance even with inflation being high.

The first thing is to shop around for the best value. Note the need to avoid the trap of comparing apples to oranges: You don’t want to just look at the premium and decide on the policy or insurer that offers the lowest premium. You must take the insurance coverage payout into consideration and also ensure that you have the right coverage for you and your family. Many low premium policies come with coverage limits. One easy example is that your house is valued at $1.2 million but the policy only covers $1 million replacement cost. That defeats the purpose of buying insurance in the first place, as you will not have peace of mind when something bad happened to your house.

The second thing is to keep a decent amount of deductible, which is the amount you will have to pay — out of your own pocket — before your insurance coverage kicks in. It is always the case that a higher deductible means lower insurance premium because insurer knows they don’t have to cover all the cost in a claim, you will pay a part of it by yourself. This applies to those with enough savings to pay the deductible. The other reason insurer prefers high deductible is that people willing to pay a higher deductible tend to be more careful in avoiding risks.

The third thing, perhaps the most important and least risky, is to bundle your policies together. See my other post on details.

The fourth thing is to maintain a good credit scores, which insurers use to determine the premium rate.

The fifth thing is to ask for discounts from your insurer. There are numerous discounts, and many insurance agents will actively search for you in order to attract you and to get your business.

Note the flip side of seeking discounts is to avoid “premium boosting” factors. The best example is having a teenager driver on your auto insurance policy. For example, this report by Bankrate tells us that for a married couple the national average premium without a teen driver is $1,898, but after adding a teen driver it jumps to $4,392! The final thing is to always review your insurance policy to ensure that you have enough insurance coverage even during inflation. See above discussion on homeowner insurance for details.

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Property Insurance

How to Fight and Win Wildfire Crisis

The Takeaways

  1. Wildfire risk costs many condos and townhouses under homeowner association or HOA the accessibility to property insurance, or they must pay a significantly higher price to be covered.
  2. Pushing insurance to state sponsored insurers like Fair Plan is not a sustainable solution.
  3. Wildfire mitigation (clearing vegetations near house) is one way to increase insurability but we need high tech solutions as well.
  4. It’s good that California Department of Insurance asks insurers to give discounts to home hardening and wildfire resilient communities.
  5. New solar cells printed on fabrics offer light weight, flexibility and high efficiency on generating solar energy.
  6. We can hit three birds with one stone by coating solar fabrics with fire retardant so they can generate solar energy, protect roofs, houses, porches, yards and detached buildings and significantly reduce insurance cost. The point is to make fire safety to pay for itself by generating and selling solar power to the grid.

Shocking News in California on the Insurance Side

I’ve just written a post on fighting flood a few days ago and now the news from the Triple-I newsletter shocked me from somewhere closer to home, with a title that seems harmless: “California senate pushes to stabilize the homeowners insurance market.”

When you click it and read it, however, the contents are really nothing less than being shocking. The report started with the sentence that “Homeowners insurance prices in California are skyrocketing with the increased threat of wildfires.”

But to hear the word “skyrocketing” is not enough, you need to see the prices to fully appreciate the change and impact.

This report in early 2022 tells us that “there were an average of 62,805 wildfires and an average of 7.5 million acres impacted annually,” in the years from 2011 to 2020.

There is someone living in a condo in San Diego County, who owns a townhome in an HOA (Home-Owner Association) with 186 others. “During our HOAs last insurance renewal we were notified that we would not be renewed due to proximity to high fire risk areas.”

The policy they started with was $54,000 a year (apparently this is for the so called “master” insurance policy for the entire complex, which HOAs often buy for the common areas like swimming pool, gym, parking lots, gates, landscape, parks and playground, clubhouse, trails, common building and lighting), but now the annual premium for this year is $293,000, a more than five time increase, which led to an emergency assessment to each unit owner to cover the cost of that new premium amount.

From another planned community in Anaheim Hills: 

“In 2020, Horizons paid $39,000 for property and fire insurance,” Hayes said. “This year, we are going to pay out $417,000 plus interest,” which is more than 10 times higher. 

In another report published on February 16, 2023, Farmers Insurance dropped coverage on more than 1,000 condo owners in San Diego due to wildfire risk.

Limited Fire Insurance Options

When someone lost private fire insurance, they can temporarily use the state’s Fair Plan, a non-profit insurance plan, which is meant to be the insurance of last resort. Fair Plan offers plans that are however not large enough to cover HOAs.

The insurance industry is not too keen on solutions that include state-run insurance programs, like Florida’s Citizens Property Insurance, or California’s Fair Plan that provides fire insurance as a policy of last resort.

One correspondent named Ruiz from Insurance Information Institute (or Triple-I) is quick to point out why insurance companies are not renewing policies on large condo complexes.

“Inflation has really driven up the cost of building,” she said. “Since 2017, we’ve seen a huge increase in the numbers of wildfires and the losses from wildfires.”

When it comes to solving the condo insurance crisis in California, Ruiz mainly talks about wildfire mitigation, like clearing brush and hardening homes.

Policy Incentive for Fire Safety

But future solutions are coming, Ruiz said. Beginning in April, the state will start looking at lower insurance rates as a reward for fire mitigation.

“So the California Department of Insurance has asked all the admitted insurance companies to file new rating structures that would include discounts for home hardening, and community wildfire resilience,” said Ruiz.

“After the changes go through with the Department of Insurance, there will be more insurance available to condo associations, condo owners, and the insurance market will be in a much better place,” Ruiz predicted.

Help at the Federal Level

Within the past year, the Biden Administration has increased efforts to make the job of firefighters safer and better. They’ve done this by signing reform laws into place that drastically increase the compensation for firefighters, change their status to full time employees in many circumstances, and make it easier for them to access mental health services.

In the Biden Administration’s proposed FY2022 budget, there was a significant amount of discretionary dollars earmarked to make new technologies available to firefighters. These technologies could go a long way to making every firefighter more connected, more informed, and better prepared for when disaster strikes, and they’re called into action. Some of these technologies could also make it easier for firefighters that are isolated or injured to be found and rescued.

New Tech Fire Solutions

Here are some of the technologies that the Biden Administration could make available to firefighters, and how they could make a difference in wildfire situations:

Internet of Things (IoT) technologies and sensors

Testing of wildfire detection sensors is currently being spearheaded by the Department of Homeland Security (DHS) Science and Technology Directorate (S&T). According to Jeff Booth, Director of S&T’s Sensors and Platforms Technology Center, “These sensors will provide early alerting capabilities in high-risk areas where detection and alerting aren’t currently available.”

By identifying wildfires in geographically remote, high-risk areas more rapidly, firefighters can begin fighting and managing fires before they grow incredibly large and increasingly dangerous. They can also engage fires before they spread to areas where personal property and lives could be put in danger.

Mobile Mesh Networking

Mobile mesh networking can enable the use of communications and situational awareness tools off the grid in places where other terrestrial networks don’t exist.

This means that firefighters will be able to share information and see each other’s locations even in isolated, remote locations. They can also be used to spread connectivity over a wide geographic area and to each individual without a single, centralized piece of equipment that can be compromised and fail. This means they can deliver resilient and redundant communications that is always available to the firefighter.

Finally, mobile mesh networking can be a low-cost alternative to connecting IoT (Internet of Things) devices. Instead of each individual sensor requiring its own expensive cellular connection – or incredibly pricey satellite connection – mobile mesh can be used to connect IoT devices over a wide geographic area with no recurring cost. This can help accelerate fire focused IoT programs, and enable the government to extend them to more areas at a lower cost to the taxpayer.

Household Self Protection

We have all seen big airplanes dropping red fire retardant powder off the sky over the fired areas. This video shows a preventive alternative before fire starts — without using an airplane. It allows households to spray fire retardant through home or garden hoses on vegetation and yard before fire season.

You do need to spray it every year and it costs $20,000+ a mile for a 20 ft wide zone along power lines or roads. The other potential side effects is environmental or human risk, as fire retardant may have health hazards over human bodies as this video shows.

An Innovation in Solar Panel

Speaking of the home based solutions, one seemingly unrelated development from the MIT One Lab is the creation of solar films that is very thin, flexible, light and yet 18 times more powerful per kilogram than the rigid solar panel that is supposedly capable of turning any surface into a power source. The solar cells are entirely printable, using ink-based materials and scalable fabrication techniques.

While the solar cells are thin and printable, they do have problems. Standing by themselves the solar modules are not easy to handle and can easily tear. The MIT team needs to find a lightweight, flexible, and high-strength substrate to attach their solar cells to.

An ideal material—a composite fabric that weighs only 13 grams per square meter, commercially known as Dyneema, fits the purpose perfectly. By adding a layer of UV-curable glue, they adhere the solar modules to sheets of this fabric. This forms an ultra-light and mechanically robust solar structure.

Hitting Three Birds with One Stone

At this point the idea hits me: If we coat Dyneema with fire retardant chemicals before the MIT solar cells are attached to it, we will produce flame safe and solar capable structure and then install it on rooftops, we will hit three birds with one stone: Home based energy generation, home fire safety and homeowner policies at lowering cost.  

ChatGPT, when asked, gives the following answer on the feasibility of fire retardant coating:

“Yes, Dyneema can be coated with a fire retardant coating. Dyneema is a high-strength synthetic fiber that is often used in applications where flame resistance is important, such as protective clothing and equipment for firefighters, military personnel, and industrial workers.

“There are various types of fire retardant coatings available in the market, including intumescent coatings and ablative coatings, which can be applied to Dyneema fibers to enhance their fire resistance properties. These coatings work by either expanding and forming a protective barrier when exposed to heat or charring to insulate the fibers from further heat exposure.”

In terms of the cost, ChatGPT has the following to say:

“Dyneema is a high-performance fiber that is known for its exceptional strength, light weight, and resistance to abrasion and tearing. The cost of Dyneema can vary depending on the specific application, the manufacturer, and the quantity purchased.

“As a general guide, Dyneema is typically more expensive than traditional materials like nylon and polyester. The price of Dyneema can range from several dollars per yard for small quantities to several hundred dollars per yard for industrial-grade products.

“However, it is important to note that the high cost of Dyneema is often offset by its superior performance, durability, and lifespan. Dyneema is often used in applications where strength and reliability are critical, such as high-performance sails, body armor, and climbing equipment, where the high cost is justified by its benefits.”

I would say for high cost neighborhoods and upper scale houses, Dyneema will have a market demand there. For affordable housing and student housing on campus, on the other hand, other fabrics would work better as long as it is transparent (to allow sunlight to penetrate to the solar cells) and flexible (for easy deployments on rooftops, corners, porches, front yard, detached buildings and backyard. Bear in mind that in the long run the cost for Dyneema will be paid off by the energy it generated, so even affordable housing projects can sometimes choose the longer lasting fabrics.

Again, the beauty of this solution is to potentially make fire safety to pay itself, through generating and selling home generated solar energy, and significantly reduces insurance cost.

The good thing is that many roofs in California already have solar panels installed. All we need to do now is to add another very strong home safety reason to install more. Doing so will make an immediate difference in home finance, because insurance companies will be much more willing to cover your house with fire retardant roofs and front yard and backyard. This would apply especially well to all condos and townhouses or anywhere with an HOA, who will no longer be rejected for master insurance policy by a private insurer.

Maybe in the future all solar panels will be fire retardant by default!

Categories
Property Insurance

Flood Insurance, What Do You Need to Know?

The Takeaways:

  1. Water causes far more human injuries and property damage than file.
  2. Only 1 in 6 homes in the United States is insured against flood. Yet 90 percent of natural catastrophes in the country involve flooding.
  3. The private flood insurance market is slowly but surely growing.
  4. More people and families moved to hurricane- and flood-prone areas in Florida and Texas, as well as parts of California, Nevada, and Washington.
  5. Many people incorrectly assume homeowners insurance covers flood damage or believe they only need flood insurance if their mortgage lender requires it.
  6. 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.