A new report from AM Best has highlighted that appetite for flood risk among US insurers is still limited, despite a slow transition towards the private market playing a more prominent role in providing competitive market options for those seeking coverage.
The rating agency notes that the federally operated National Flood Insurance Program (NFIP) notched a $20.5 billion shortfall earlier in the year, a figure that includes losses dating back to Hurricane Katrina in 2005.
Meanwhile, insurers providing private coverage appear more inclined to cover commercial risk, with over 70% of overall private flood premium generated from commercial property exposures.
“If private insurers are able to price risks individually, they will cherry-pick the best risks with pricing better than the NFIP’s subsidized rates, leading to further adverse selection,” said Christopher Graham, senior industry analyst, AM Best.
Looking ahead, the aim of a new NFIP rate structure is scheduled to take effect October 1st, 2021, and move all properties to a true risk-based rate.
Under the program known as Risk Rating 2.0, the annual premium rate is expected to decline for a quarter of the policyholders obtaining coverage through the NFIP.
However, AM Best believes that many will see their rates increase and reach their full risk rate in approximately five years.
Higher premium costs for federal flood insurance should make the private insurance pricing more competitive, driving more insureds to the private market.
“This should help better spread the flood risk among private carriers and the NFIP, as well as create a better overall flood insurance market for customers needing the coverage,” said David Blades, associate director at AM Best.