Press Release - AUGUST 01, 2018

Best’s Special Report: NFIP Extended but Private Markets May Provide Long-Term Flood Relief

 David Blades, CPCU
Senior Industry Analyst,
Industry Research and Analytics
+1 908 439 2200, ext. 5422

Sridhar Manyem
Director, Industry Research
and Analytics
+1 908 439 2200, ext. 5612
Christopher Sharkey
Manager, Public Relations
(908) 439 2200, ext. 5159

Jim Peavy
Director, Public Relations
(908) 439 2200, ext. 5644


Another stop-gap reauthorization for the National Flood Insurance Program (NFIP), the latest through November 2018, highlights the potential public-private partnerships hold toward securing a favorable long-term flood insurance solution, according to a new A.M. Best special report.

The Best’s Special Report, “NFIP Extended but Private Markets May Provide Long-Term Flood Relief,” states that private and capital markets are showing measured interest in accepting flood risk. The potential for an increase in private insurance solutions for property exposed to flood could substantially change the U.S. market. Surplus lines insurers in particular would be ready and willing to increase their flood-risk exposure under conditions that will allow them to underwrite and price risk appropriately. With an increased ease of doing business, the industry may be encouraged to participate more in the flood market and increase consumer awareness about flood insurance.

In addition, as the capabilities to analyze flood risk increases give the private market better insight into underwriting and pricing flood risk, there would be more willingness by insurers to assume this risk in a measured manner.

Government-subsidized premiums that have not adequately reflected risk exposures, along with statutory caps on premium increases, the lack of capital requirements or need to earn a profit and mandatory purchase requirements have all contributed to the NFIP’s instability. In the past two years, the Federal Emergency Management Agency has secured reinsurance coverage in an effort to help transfer some of its risk and better protect the taxpayers, and in 2018, FEMA secured its first catastrophe bond, transferring risk from the NFIP to the capital markets for additional reinsurance coverage.

Flood insurance, private and federal, is subject to severity risk, which has only increased as coastal migration has created dense populations in high flood-risk areas. Because of the catastrophe events of 2017, loss ratios deteriorated sharply. Of the insurers that wrote at least $1.0 million in private flood coverage last year, nine had direct loss ratios higher than 100%. The amount paid in NFIP losses for hurricanes Harvey, Irma, and Maria was $9.3 billion, with $8.4 billion of that total attributable to Harvey alone. Annual average flood losses since 1978 are $1.4 billion, but over the last 12 years, they have risen to $3.6 billion. The densely populated coastal regions are a major concern that will exacerbate the severity of flooding as more people and homes are affected by natural disasters. At the same time, the number of NFIP policies in force has more than doubled over the past 25 years.

Flood risk is incredibly complex, and the industry has yet to see standardization in the modeling process. While A.M. Best does not anticipate any ratings action because of slight increases to flood exposures, any significant increase in appetite would require insurers to provide the results of stress testing for capital adequacy, as well as their rationale for the increased risk appetite, reinsurance and other risk management strategies.

To access the full copy of this special report, please visit .

A.M. Best is a global rating agency and information provider with a unique focus on the insurance industry.