Too often, the story around U.S. flood risk focuses on FEMA and what the entity either isn’t doing right or could be doing better, when the real story is the dangerously low levels of flood insurance penetration, according to Jonathan Clark of Guy Carpenter.
Clark, who leads the Public Sector division at the reinsurance broking arm of Marsh, Guy Carpenter, spoke recently with Reinsurance News about the U.S. flood insurance space, offering some interesting thoughts on what could be done to boost penetration.
The flood protection gap (disparity between economic and insured losses post-event) is vast in all parts of the world, and with the impacts of climate change driving sea levels higher, the annual economic hit from flood events is expected to rise.
Of course, in the U.S. through FEMA and the National Flood Insurance Programme (NFIP) efforts have been made to improve the flood landscape and insurance penetration through mandatory take-up.
For background, FEMA produces flood maps that are used by communities to set minimum building requirements for coastal regions and floodplains, and by lenders to determine flood insurance requirements.
Certain zones within the flood maps viewed as high-risk areas are known as Special Flood Hazard Areas (the 1-in-100-year floodplains). Homes and businesses located in these areas that have loans, including mortgages, from federally regulated lenders are required to purchase flood insurance.
“Often, when I look at flood, from a US perspective, I’m struck by where the story focuses. It’s often the case that pre-event, people and communities are arguing that the flood maps are inaccurate with an emphasis on the fact that they shouldn’t be required to purchase flood insurance. After the event, the argument flips – property owners having suffered an uninsured flood loss claim they weren’t informed or didn’t understand their exposure,” said Clark.
Adding, “The real story of flood in the US is the lack of insurance take-up. And, you see it after every single significant event. Less than 4% of households in the US purchase flood insurance. Outside of FEMA’s Special Flood Hazard Areas, where it is estimated that there are 30 million structures with moderate to high flood exposure, the flood insurance take up is less than 1%.”
It’s a valid point and brings to mind the devastation caused by Hurricane Harvey in 2017, an event which brought significant flooding to parts of Texas and Louisiana and estimated re/insurance industry losses of $30 billion.
The overall economic impact from Hurricane Harvey was much higher at an estimated $85 billion, meaning that the majority of the loss was not covered by insurance. Clark explained to Reinsurance News that more than 75% of the people flooded in that event lacked insurance, while those with protection received on average $110,000 more in recovery than those without.
“It’s just a stark reminder of how important insurance, and by extension reinsurance, can be in helping communities to simply get back on their feet quicker. The dollars get unlocked very, very quickly and can be put to immediate use,” he said.
Clearly, the 1-in-100-year floodplain provision that was introduced in the early 70s has had some positive influence on flood insurance penetration in the U.S., but according to Clark, it needs to go further.
“To improve this landscape and bolster community resilience, insurance penetration must be increased. Two steps would help contribute to this.
“First, better enforcement surrounding required purchasing. Often, while flood insurance is secured to satisfy mortgage requirements, you will notice in-force policies decline over the ensuing years as property owners allow coverage to lapse. Some banks have recently been fined when it was discovered that they weren’t making sure that required coverage was maintained.
“We also believe a mandatory ‘make-offer’ provision could help promote take-up beyond the mandatory purchase required in the 100-year flood plain provision. It would promote a constructive dialogue between the realtor, insurance agent and the homebuyer as to what their flood risk is. We believe the existing framework on this matter is too binary, you either must buy the coverage because the mortgage requires it, or you are not required to and therefore buyers don’t.
“This is the area where we’re really encouraged by some of what we see going on in the tech area. The ability to access and analyse data and from there communicate risk is changing at a rapid pace around the subject of flooding in the U.S. Being able to analyse flood exposure in this country will help make improve the dialogue,” explained Clark.
The numbers are absolutely clear and the truth of the matter is that a lot of people that are impacted by flooding every year in the states live outside of these Special Flood Hazard Areas.
“So, it’s a huge opportunity and we think that’s certainly one area where our industry can lean in more,” said Clark.
