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Low flood insurance uptake in Florida poses tough challenge after Hurricane Ian

NEW YORK(Thomson Reuters Regulatory Intelligence) - Hurricane Ian likely caused more damage to property with its storm surge than high-end Category 4 winds, estimates show, meaning the level of uninsured losses strain homeowners and businesses due to their relatively low purchases of flood insurance. Regulators and lawmakers must work to encourage private insurers to improve the stability of the market, remove rate subsidies that steer people to federal flood insurance even though it provides less coverage, and communicate risks effectively, experts said.

Remains of destroyed restaurants, shops, the Fort Myers Fishing Pier and other businesses are seen almost one month after Hurricane Ian landfall in Fort Myers Beach, Florida, U.S., October 26, 2022.

Less than 50 percent of Florida homeowners buy flood insurance, according to the Insurance Information Institute (III), even though the state is most at risk of being struck by a hurricane in the United States(LINK: here). Florida also ranks among the top three states – after Louisiana and Texas – in claims payouts from the federal National Flood Insurance Program (NFIP).

“Nobody has been able to find a real silver bullet for getting more people to buy flood insurance,” said Carolyn Kousky, Associate Vice President for Economics and Policy at Environmental Defense Fund and author of a book on disaster insurance. “We aren’t doing a good enough job communicating the flood risk. We definitely need more outreach and education about the risk, and also what it means [in terms of damages, recovery]”.

Only 18.5 percent of homes in the counties under evacuation orders in Florida had an NFIP policy before the hurricane, estimated Milliman, a consulting and actuarial firm.

NFIP paid more than $82 million to policyholders in 39,000 flood insurance claims as of Tuesday, the Federal Emergency Management Agency (FEMA), which administers NFIP said(LINK: here). Private flood insurers have reported about 2,750 claims of the overall 544,000 claims from the hurricane. Total claims have crossed $6.1 billion, the Florida Office of Insurance Regulation (FLOIR) said(LINK: www.floir.com/home/ian).

“Hurricane Ian demonstrates that private market constructs need to be brought to bear to a far greater extent in responding to the peril of flood across the United States,” said Craig Poulton, CEO of Poulton Associates which administers the Natural Catastrophe Insurance Program, the private insurance alternative to the NFIP.

More than 40 companies write private flood insurance in the state, according to FLOIR, but hold only 10 percent of the market share while the NFIP writes the remaining 90 percent.

UPTAKE OF PRIVATE FLOOD COVERAGE LOW, LIMITED BY STRUCTURE OF NFIP

Experts and some regulators have said encouraging private carriers to take on some of the risk underwritten by the NFIP could help alleviate some pressure on the federal debt-ridden program. Critics and other regulators have alleged the move would lead to cherry-picking by insurers, leading to further deterioration of the NFIP’s risk pool.

Private insurers offer more than double the $250,000 rebuilding coverage provided by an NFIP policy, smaller waiting periods and loss-of-use benefits among others. Their uptake, however, is limited by the NFIP’s rate subsidies, mortgage lenders’ strong preference for NFIP coverage and FEMA’s antiquated flood maps that do not accurately classify or communicate risk to policyholders, experts said.

The NFIP’s Risk Rating 2.0 program attempts to correct the rate inequity by offering new sign-ups actuarially sound rates that better reflect a property’s flood risk, but it continues to charge older policyholders subsidized rates and allows the transfer of policies on certain properties to their new owners.

“Flood insurance rates as articulated by the National Flood Insurance Program, continue to be woefully inadequate,” Poulton said. “Both taxpayers and policyholders will pay a high price again, as they have in every major hurricane event for the last 50 years.”

The average annual cost of private flood insurance in Florida is $1,479, according to data published by the National Association of Insurance Commissioners and analyzed by online insurance marketplace Policygenius. That makes private flood coverage in the state about 83 percent more expensive on average than NFIP flood insurance, said Pat Howard, property and casualty insurance expert at Policygenius.

The NFIP rate structure under the 2.0 program will raise premiums by about $10 per month for 68 percent of policies in Florida, while the maximum rate increase of $20 and more would be borne by only 4.2 percent of its policyholders in the state, data from FEMA shows(LINK: here). Rate hikes on existing NFIP policies are capped at 18 percent.

In areas where private insurers are able to offer competitive rates, policyholders are often unable to take advantage of these options as the NFIP does not allow mid-term cancellation of its policies, except in very limited circumstances. Policyholders are only allowed a 30-day window after purchase or renewal to cancel and sign up for a different program.

The NFIP’s terms allow the program to avoid higher risk from consumers signing up for coverage only during high-risk periods.

NFIP AS AN INSURER OF LAST RESORT

Experts have suggested the NFIP shift its role from that of the dominant flood insurer in the United States to that of an insurer of last resort in order to distribute flood risk. That, however, raises questions over the pricing of risk and the ability of private appetite to scale up to underwrite more areas.

“There is much that can be done to reform America’s flood insurance system. First, Congress should require the NFIP to do away with the mid-term cancellation rule that is currently limiting consumer choice when it comes to flood insurance. Second, Congress should require FEMA to develop flood maps that include all structures located in the 100-year flood plain so flood insurance premiums are distributed over a larger geographic area,” Poulton said.

The geographic spread of risk would help lower insurance premiums and accurate flood maps would increase the number of flood insurance buyers by at least 35 to 50 percent he added.

The private market was equipped to take on more risk if the NFIP were to retreat from its current capacity and allow insurers to discover the best way to price and distribute flood coverage while the insurer of last resort allows policyholders in and out of its marketplace, Poulton said. The insurer of last resort may have to absorb large losses once in a few decades, but the risk would remain distributed between the public and private markets.

Kousky said the role change for the NFIP could require significant changes to how flood insurance is underwritten across the country – a politically challenging feat, given lawmakers’ divided views on the extent to which the government must support the insurance market.

The severity of disasters as a result of climate change makes it more difficult to address these efforts, she added. “What we’re seeing with wildfire in California is that climate change is making all this worse. It’s starting to get to the point where there’s real reluctance on the part of the private sector to step into these risks that we know are just getting worse,” Kousky said.

That makes the stabilization of these markets and the availability of disaster insurance a bigger policy priority to address, as mitigation efforts such as prohibiting development in the highest risk areas and the implementation of safer building codes will have to take centerstage, she added.

(Reporting by Antonita Madonna in New York, Regulatory Intelligence)

*To read more by the Thomson Reuters Regulatory Intelligence team click here: bit.ly/TR-RegIntel

This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - and initially posted on Oct 21. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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