A new approach in determining rates for policies issued through the National Flood Insurance Program (NFIP), Risk Rating 2.0, appears to be moving more premium into the US private flood insurance market, says global ratings agency AM Best.
Looking at the situation from a geographic standpoint, a considerable amount of flood premium remains concentrated in the Atlantic Hurricane Basin. Seven of the eight US states with more than $100 million in private and public flood premium are located within this region.
However, the lone state which is not located there is California, which has now experienced two major flooding events in 2023, in addition to a magnitude 5.1 earthquake during that last event.
If you recall in late January, global catastrophe and risk modelling solutions firm, Moody’s RMS estimated total US economic losses from the California flooding between December – January to be between $5-7 billion.
“The California floods and mudslides earlier this year will pose a good test of the private flood market. California has a larger share of flood DPW in the private market than any other state with at least $100 million in DPW,” said Christopher Graham, senior industry analyst, AM Best.
According to Best, business insurance is said to be driving the increase in the purchase of private flood insurance, driven by the need for larger policy limits.
It is worth noting, that the goal of the Risk Rating 2.0 system that was implemented in 2021 was to improve flood premium determination so that it reflected actual, up-to-date flood risk based on higher quality information.
Ultimately this has led to private insurance coverage becoming more competitive, as the number of insurers offering this has more than quadrupled from 47 in 2016, all the way to a staggering 198 in 2022.
At the same, in calendar year 2022, which included nine months of the new rating plan, private flood direct premiums written (DPW) jumped up by 24%, while federal flood DPW decreased by almost 12%.
Best expects that 2023 results will provide a more clear indication as to how the private market is handling the flood risk.
Further rate increases to NFIP policyholders, currently capped at 18% per year until the true risk rate is reached, should lead to more insureds moving to private insurers.
