The upcoming reauthorization of the National Flood Insurance Program (NFIP) has created a flurry of renewed interest in U.S. flood reinsurance, but with social and political uncertainties and the nature of flood risk itself remaining as significant obstacles, what kind of market growth is realistic for the foreseeable future?
In a recent report on the U.S. flood risk market, S&P Rating analysts predict reinsurers will grow into the market space gradually, taking a cautious stance to limit business exposures.
And reinsurers looking for a greater market share could spur primary market growth, but within an environment of uncertainties and regulatory constraints, S&P suggested reinsurers would be ‘tip-toeing’ into flood risk; “Flood risk has unique modeling challenges that require data at a more granular level than has been the case.”
“The data challenges and lack of robust historical loss analysis make modeling floods difficult. Vendor models have risk for coastal flooding built into their hurricane models, which makes them somewhat useful, but inland flooding has proved more difficult to simulate.”
However, reinsurers’ ability to accurately assess flood risk has been improving, and it’s sparking increased interest in the market.
Earlier this year, NFIP turned to reinsurance to transfer about $1 billion of its flood risk, structured as 26% of $4 billion in excess of $4 billion of losses.
“There was sufficient interest in the program with a decent number of reinsurers participating, highlighting increasing comfort with the risk,” S&P commented.
The increased willingness of reinsurers to cover flood risk, coupled with a growing demand from NFIP for reinsurance capital, signalls high potential for market growth; “The necessity of expanding NFIP’s reinsurance utilization is evident in Chart 1.
“Under the current 2017 reinsurance structure and borrowing authority, NFIP would be about $2.7 billion short, per our estimate, if a 1-10 year event occurred and in such a case it would need Congressional approval to cover this shortfall with additional borrowing from the Treasury.”
“We expect reinsurance to play an increased role in the NFIP, which has described the 2017 reinsurance transaction as “setting the foundation for a multi-year reinsurance program.”
“This explicit support for reinsurance coupled with a need for multiple risk financing mechanisms almost ensures that the role of reinsurance will continue to grow,” S&P Global explained.
And as reinsurance capacity grows it’ll open doors for primary insurance to follow, in the case of U.S. flood risk its leverage helps NFIP finance and manage existing risks, or acts as a partner to primary insurers, providing leverage to enter the market without taking on more risks than they can absorb.
When it comes to U.S. risk cover growth, S&P analysts commented that “the current and future role of reinsurers is definitely front of mind,” but as promising as the growth for reinsurance demand may be, the challenges remain substantial for reinsurers; “as such, they’ll provide limited capacity and extend underwriting/modeling support to selected partners to start operating in the market and the build-up will be gradual over a number of years.
“Regardless, the opportunity set provides an avenue for growth in 2018 and beyond, with 2017 likely being the year where primary insurers and reinsurers test out the target markets.”