A Fitch Ratings report has said that the recent numerous inland flood events are expected to have a negligible credit impact on the U.S. P/C industry and are unlikely to affect individual insurers’ or reinsurers’ capital or earnings.
Despite the tragic loss of life and significant economic losses in affected areas, less than 10% of homeowners are buying coverage and even lower are taking up rates away from the coasts in areas with a more limited history of flood activity. The latest devastation has revealed the potential for catastrophic flood events in areas that have not traditionally been considered at higher risk.
The report states that the private market flood business in the U.S. has grown in recent years but remains less than 1% of industry direct premiums written. The relatively small exposure limits the industrywide potential for loss. Standard homeowners’ insurance does not cover flood damage, and in cases where rapid flood activity occurs in areas considered less at risk of flooding, much of the damage is left uninsured.
Some individual private markets offer stand-alone flood products and endorsements to homeowners’ policies, but given the relatively small market size, the overall impact on industry results will be limited.
Homeowners who purchase flood insurance most commonly do so through the National Flood Insurance Program (NFIP), a government-supported flood insurer run by the Federal Emergency Management Association (FEMA). Mortgage lenders require flood insurance if a homeowner has a federally backed mortgage and lives in a FEMA high-risk flood zone or if the homeowner has received prior FEMA compensation for flood damage.
The private (re)insurance market would be most exposed to a loss from the NFIP’s catastrophe reinsurance in the case of a major hurricane that led to significant precipitation and storm surge. The NFIP catastrophe reinsurance program includes a panel of traditional reinsurance companies, including several of the largest global (re)insurers that provide reinsurance coverage for significant loss events. For Hurricane Harvey in 2017, the NFIP paid policyholders over $9.0 billion in claims and recovered the entire $1.042 billion limit from its reinsurers.
Loss estimates for the recent individual flood losses in the U.S. are not yet available but would likely be considerably below the 2022 catastrophe reinsurance program attachment. Losses begin to cede to the reinsurance program when insured NFIP losses for an individual event reach $6.0 billion.