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The Emerging Private Residential Flood Insurance Market in the United States

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The Emerging Private Residential Flood Insurance Market in the United States The Emerging Private Residential Flood Insurance Market in the United States Carolyn Kousky, Howard Kunreuther, Brett Lingle, and Leonard Shabman July 2018 Wharton Risk Management and Decision Processes Center | Knowledge@Wharton Contents Executive Summary ............................................................................................................................................................... 1 1. Introduction ....................................................................................................................................................................... 3 2. Approach of This Report .................................................................................................................................................... 4 3. Residential Flood Insurance Today .................................................................................................................................... 5 3.1. Overview of Private Flood Insurance .......................................................................................................................... 5 3.2. Background on the NFIP .......................................................................................................................................... 6 3.3. The Flood Insurance Gap ........................................................................................................................................... 9 3.4. Market Structure ...................................................................................................................................................... 11 3.4.1. Admitted versus Excess and Surplus ................................................................................................................. 11 3.4.2. Policy Distribution .............................................................................................................................................. 13 3.4.3. Reinsurance ...................................................................................................................................................... 13 3.4.4. Overview of the Residential Flood Market ......................................................................................................... 14 3.5 Analysis of Private Insurers........................................................................................................................................ 16 3.5.1. Types of Firms ................................................................................................................................................... 16 3.5.2. Policy Terms ...................................................................................................................................................... 19 3.5.3. Pricing and Underwriting Strategies ................................................................................................................... 20 3.6. State Analysis .......................................................................................................................................................... 23 3.6.1. Texas ................................................................................................................................................................. 25 3.6.2 Florida ................................................................................................................................................................ 25 3.7. Market Evolution ...................................................................................................................................................... 27 4. Market Drivers ................................................................................................................................................................. 28 4.1. Interaction with the NFIP .......................................................................................................................................... 28 4.1.1 WYO Program .................................................................................................................................................... 28 4.1.2 The Mandatory Purchase Requirement and Lender Acceptance ......................................................................... 28 4.1.3. Rate Competition .............................................................................................................................................. 30 4.1.4. Data and FIRMs ................................................................................................................................................ 30 4.1.5. Use of Forms ..................................................................................................................................................... 31 4.1.6 Continuous Coverage and Mid-Term Refunds .................................................................................................... 32 4.2. Managing Catastrophic Risk .................................................................................................................................... 32 4.2.1 Data and Modeling ............................................................................................................................................ 33 4.2.2. Reinsurance for Managing Catastrophic Risk ..................................................................................................... 34 4.2.3. Managing Concentration ................................................................................................................................... 35 4.3. State Regulation and Legislation .............................................................................................................................. 35 4.4. Agents ..................................................................................................................................................................... 38 4.5. Demand .................................................................................................................................................................. 39 4.6. Exposure Management ............................................................................................................................................ 40 5. Implications for the Future of Flood Insurance .................................................................................................................. 41 Author Bios ....................................................................................................................................................................... 44 References ........................................................................................................................................................................ 46 Appendix 1: Interviewees ..................................................................................................................................................... 50 The Emerging Private Residential Flood Insurance Market in the United States Executive Summary 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. ACKNOWLEDGEMENTS This report is based on work supported by the Science and Technology Directorate of the US Department of Homeland Security for the Flood Apex Program under Contract HSHQDC-17-C-B0032. The views and conclusions contained in this document are those of the authors and should not be interpreted as necessarily representing the official policies, either expressed or implied, of the US Department of
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