A report from AM Best has suggested that the historic ongoing flooding in California highlights a need for a robust private flood market.
Since late December, California has been hit with extreme rain and winds, leaving entire neighbourhoods under water, downing trees, and causing severe mudslides.
AM Best’s report explains that the storms are being driven by an atmospheric river, which is a windy region of the Earth’s atmosphere that can transport moisture for miles.
Despite the unrelenting rain, the ground in California and surrounding regions are unable to soak up the water due to prolonged drought and the following devastating wildfires, further exacerbating the effects of the flooding.
AM Best writes, “With the extreme weather continuing into mid-January, it is too early to begin calculating the cost of damage to homeowners and businesses across the state, but the cost is ultimately expected to be in the billions.
“AM Best estimates that 98% of California residents are not insured for direct flood exposures. These storms in California and the ongoing flooding will therefore shine a spotlight on private flood insurance.”
Trailing only Florida, the state of California is the second-largest in terms of private flood premium. Further, private flood insurance accounts for over 40% of California’s entire flood market, a much larger share than other leading states for flood insurance.
The rating agency states that the storms and resulting floods present a “good test” for the private flood insurance market.
AM Best continues, “The inadequacy of the National Flood Insurance Program’s (NFIP) rates has been apparent for some time, having been clearly exposed by Hurricane Katrina.
“The problem of flooding has been exacerbated by the rising number of homes being built in flood plains and the resulting diminishing runoff areas, leading to greater water accumulation.
“Private insurers would never have been able to withstand such a period of rate inadequacy, which is one of the reasons private flood insurance solutions have not been more prevalent in the marketplace.
“When the NFIP implemented Risk Rating 2.0, in an effort to apply rates that more adequately addressed flood risk, there was hope that more private insurers would provide flood insurance options outside the federal program.”
The rating agency suggests that this seems to have taken hold the most in California, adding that of the states with at least $100 million of direct premiums written in flood insurance, California has the largest share of premium written by the private market compared with just 24% nationally.
