In preventing the National Flood Insurance Program (NFIP) from expiring with a last minute vote, and securing its continuation through November 2018 without any of the long-requested amendments, the U.S congress has highlighted the potential for private markets to provide long-term flood relief, A.M. Best says.
This assessment comes as the Federal Emergency Management Agency (FEMA) announced it had recently secured its first catastrophe bond, transferring $500 million of risk from the NFIP to the capital markets for additional reinsurance coverage.
A.M. Best’s report states that private and capital markets are showing measured interest in accepting flood risk and that such an intervention could substantially change the U.S market.
Surplus lines insurers in particular would be ready and willing to increase their flood-risk exposure under conditions that will allow them to underwrite and price risk appropriately.
While an increased ease of doing business would encourage the industry to participate more in the flood market and increase consumer awareness about flood insurance.
According to Best, insufficient government-subsidised premiums, statutory caps on premium increases, the lack of capital requirements or need to earn a profit, and mandatory purchase requirements have all contributed to the NFIP’s instability.
Because of the catastrophe events of 2017, loss ratios deteriorated sharply. Of the insurers that wrote at least $1 million in private flood coverage last year, nine had direct loss ratios higher than 100%.
Best states the amount paid in NFIP losses for hurricanes Harvey, Irma, and Maria was $9.3 billion, with $8.4 billion of that total attributable to Harvey alone. Annual average flood losses since 1978 are $1.4 billion, but over the last 12 years, they have risen to $3.6 billion.
Furthermore, there’s a major concern that densely populated coastal regions will exacerbate the severity of flooding as more people and homes are affected. This is illustrated by the number of NFIP policies doubling in the past 25 years.
While A.M. Best does not anticipate any ratings action because of slight increases to flood exposures, any significant increase in appetite would require insurers to provide the results of stress testing for capital adequacy, as well as their rationale for the increased risk appetite, reinsurance and other risk management strategies.
