The Emerging Private Residential Flood Insurance Market in the United States

The federal National Flood Insurance Program (NFIP) underwrites the overwhelming majority of residential flood insurance policies in the United States. As of April 2018, more than 5 million NFIP policies were in force nationwide (4.8 million residential), representing slightly more than $1.28 trillion in coverage ($1.17 trillion residential). For decades, the NFIP has been homeowners’ only option for flood insurance, but over the past several years, a small private market for residential flood insurance has emerged. Policymakers are increasingly interested in learning whether the expansion of this market could help meet the policy goals of increasing the number of homeowners with flood insurance or offering more affordable coverage.

Stakeholders—in congressional testimony, op-eds, reports, and other forums—have offered diverging opinions as to the appetite of the private sector in writing more flood insurance, on the existing barriers to private coverage, and on the implications for the NFIP. The present state of the market is unclear, particularly since there is no nationwide database on the companies writing residential flood insurance, coverages offered, policy terms, pricing, and any differences between private and NFIP flood insurance. This makes it difficult to evaluate the market’s future evolution and relationship to the NFIP.

This report aims to fill these knowledge gaps and has two primary objectives:

1. to document the current state of the private, residential flood insurance market across the United States; and
2. to identify the main factors influencing the number and form of flood insurance policies offered by the private market.

To meet these objectives, we conducted in-depth, semi-structured interviews with 63 insurers, reinsurers, state brokers, and other market participants. We also gathered and analyzed current private market data from a range of sources including public documents, congressional testimony, news articles, state regulators, and private firms.

• The private residential flood insurance market in the United States is currently small relative to the NFIP. We estimate that private flood insurance accounts for roughly 3.5 to 4.5 percent of all primary residential flood policies currently purchased.
• With the exception of Puerto Rico, more policies are written by surplus lines carriers than by admitted carriers subject to state rate and form regulations. This is unsurprising, since surplus lines firms tend to cover new or catastrophic risks for which consumers may have trouble finding coverage in the admitted market.
• Roughly 20 percent of private residential flood policies (and 40 percent of admitted carrier policies) are in Puerto Rico; another roughly 20 percent are in Florida. No data are available to evaluate the size of the total private market in other states or at a substate level nationwide.
• Private market growth to date has largely been driven by the interest of global reinsurers in covering more US flood risk. In the admitted market, reinsurers are assuming most of the risk for primary insurers, often in excess of 90%. In the surplus lines market, Lloyd’s of London has played a major role, backing the majority of residential flood policies.
• Among the small number of policies written by the private sector, we identified three broad policy types. The most prevalent is what we refer to as an “NFIP+” policy within the FEMA-mapped 100-year floodplain, where flood insurance is required for federally backed mortgages. NFIP+ policies have higher limits and/or broader coverages than NFIP policies. Most are stand-alone policies, although some are sold as endorsements to homeowners policies. A second type is a lower coverage limit policy issued as an endorsement in lower risk areas. The third type, used by only a couple of firms, mimics the NFIP policy.
• There does not exist data to ascertain how many homeowners previously uninsured against flood are purchasing private policies versus how many are switching from NFIP policies to private coverage. Insurers in the market believe their portfolios include both newly insureds and policyholders switching from the NFIP.
• Since the NFIP will provide a policy to anyone in a participating community, private firms can operate only where they can price lower than the NFIP or provide broader or different coverages for which there is consumer demand. In a sense, then, the NFIP is a default benchmark for comparison with private flood insurance policies.
• Companies have identified certain types of properties or risks where they believe they can profitably operate and compete with the NFIP. Those target areas of opportunity, however, vary across firms. For example, some are restricting themselves to areas FEMA designates as lower flood risk and others are focusing on areas FEMA designates as at higher flood risk.
• The largest US homeowners insurance companies have generally been hesitant to enter the flood market, although a few have begun to enter through subsidiaries. Their caution, we learned, stems from concern about being unable to adjust rating or policy coverages as they gain experience in writing flood because of state regulatory practices; concentration of risk in their portfolio; correlation of flood with existing wind exposure; satisfaction with the current arrangement; and concern about reputational risk should they need to raise premiums or scale back coverage as they explore the potential flood market.
• More private capital is now willing to back private flood coverage in the United States. Interviewees agreed that as insurers’ familiarity with flood catastrophe models grows, as underwriting experience develops, and as state regulatory structures evolve, the number of private flood policies in force could continue to grow, including among admitted carriers. As of this writing, there were multiple new rate filings in many states, suggesting a continued expansion of the market.
• Whereas the NFIP is required to take all risks, private insurers are selective in their underwriting. All interviewees agreed that the private sector will never be able to write policies for certain properties or locations (e.g., repetitive loss properties or high-tide flooding areas) at a price homeowners would be willing to pay. Substantial public investment in risk reduction, combined with aggressive land-use management, they said, was essential for limiting future exposure and encouraging the private sector to move into those areas.
• The private market participants we interviewed differed as to how much flood risk in the US, and storm surge risk in particular, they thought could be underwritten by the private sector. All agreed there would likely remain a large and important role for the NFIP to play, particularly in the near-term.
• Acceptance of private flood insurance by banks and financial institutions does not appear to be a major constraint on the market at present. With very few exceptions, private insurers have told us banks ultimately accept their products, though they may have some initial questions or concerns.
• There is a need for expanded insurance agent education about flood risk and flood insurance products, both for the NFIP and private policies. Interviewees disagreed about whether the higher-than-market commissions paid by the NFIP were creating a disincentive for the private market.
• Most interviewees saw limited demand for flood coverage today, whether offered by the NFIP or by a private provider, and said that consumers were price sensitive.