It remains to be seen, however, if the private (re)insurance market would be able to provide sufficient capacity for flood risk at an economically viable price.
The reduction or elimination of federal assistance would create a potential opportunity for traditional private (re)insurers or alternative capital markets to serve this sizable market. The private insurance market does currently provide coverage for flood risk, but it is generally limited to commercial flood policies and excess homeowners flood coverage above the maximum for building and contents coverage provided by the National Flood Insurance Program (NFIP).
While private (re)insurers have the capacity to provide coverage for flood risk, they would need to be able to charge actuarially sound rates to be willing to write significant amounts of risk. Flood has traditionally been viewed as an uninsurable risk, requiring the need for a government solution to cover the flood exposures of individual property owners. However, more sophisticated risk mapping and modeling tools have been developed in recent years, so the private industry is more willing to provide coverage and able to more accurately price the risk.
The U.S. government has provided an unprecedented level of support for flood losses in recent years under the NFIP. The NFIP has accrued $24 billion of debt due to flood insurance claims from Hurricanes Katrina and Rita in 2005 ($22 billion), Hurricane Ike in 2008 ($3 billion), and most recently Hurricane Sandy (about $15 billion) in 2012.
This led the U.S. government to look for ways to reduce its risk, including privatization, and resulted in the Biggert-Waters Flood Insurance Reform Act of 2012, which was passed before Hurricane Sandy. This law, which re-authorized the NFIP for five years to Sept. 2017, phases out the federal government’s support for flood insurance policies and requires a study of the private reinsurance market capacity to assume a portion of the NFIP insurance risk.
Concern about increased premium rates resulting from Biggert-Waters has caused Congress to reconsider its implementation and has pushed several states, including Florida and West Virginia, to recently advance legislation to increase the availability of private flood insurance.
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Sarasota Area Real Estate Specialist