How insurers can take back control of flood risk

October 11, 2018 / 4 min read

Many insurers have kept flood risk at arm’s length, if not farther, for 50 years or more. The industry has been largely content to let coverage flow through the government’s National Flood Insurance Program (NFIP), with limited availability in the private market, especially for personal property.

But an impending surge of change in the flood market may leave little high ground for insurers to ride it out passively. Doing nothing could carry a high cost.

Historical reasons for status quo

Insurers have their historical reasons for steering clear of this hazard, but the insuring public wants one thing: coverage for disasters—the very reason they buy insurance. It seems fundamental. Many insureds may assume they’re protected against flood losses when they’re not. Or they may hold their insurers responsible for coverage that comes from the government through the NFIP, overseen by the Federal Emergency Management Agency (FEMA). Whatever the nature of the disconnect, the numbers show that it’s not a trivial matter.

Reputations at risk

Consider an April 2018 report from the Texas Department of Insurance based on a data call issued in the aftermath of Hurricane Harvey. The department found that just 9 percent of reported claims from Harvey were filed under flood insurance policies. Yet flood losses accounted for 40 percent of claim dollars paid out. Also, 43 percent of ultimate gross insured losses were expected to be from flooding, with commercial property losses running a distant second at 25 percent. In dollar terms, the largest portion of Harvey-related claims activity would be subject to the NFIP’s level of service—but private insurers, agents, and brokers provide much of the customer-facing component.

A disjointed flood claim process—or the discovery that there’s no flood coverage at all—can bring the customer’s pain to the insurer’s or agent’s doorstep. When flood damage occurs, the customer will look first to the insurer whose name is on the homeowners policy. Reputations may be on the line.

Insureds may feel they were misinformed on their need for coverage, or they may pick the most visible target to blame for a cumbersome claim process, even though it’s not entirely under the insurer’s control. At best, the strain may show in the form of phone calls or e-mails. Without a quick resolution, dissatisfaction can also spill over to social media posts, the local news, or the courts. Ultimately, it could drive clients away.

Making it simpler

Keeping flood insurance available, in place, and responsive to those who need it has typically involved FEMA; private insurers, agents, and brokers that administer and sell coverage; and mortgage lenders, which require flood insurance under federal banking regulations concerning FEMA-designated Special Flood Hazard Areas.

The effort to achieve customer satisfaction is disadvantaged from the start, because a Write Your Own flood policy differs significantly from a standard homeowners form in terms of deductibles, limits, scope of coverage, and exclusions. Claimants may have to navigate their flood policies, standard homeowners coverage, and any applicable residual market coverage, such as wind pools in hurricane-prone states. The NFIP flood product can be complex, confusing, and discouraging to customers, setting them up for a bad experience in the event of a loss.

The future of coverage

The loss exposure that shrank the private flood market a half century ago is still there and remains a possible barrier to private insurers. But private insurers and producers never completely escaped the potential to be hurt by flood events, even if they left the flood market altogether. Write Your Own insurers can still bear the ill will of customers struggling with the NFIP process. Misunderstandings over flood coverage can still tarnish insurers that don’t issue flood policies. And producers may have exposure over allegedly inadequate or erroneous advice to customers on flood insurance.

The system and the process can be made simpler for the customer and give insurers a new way to come through for policyholders. As the NFIP faces a growing burden, ISO is leading efforts to bring back a vibrant private flood insurance market. Insurers again have the ability to assume flood risk themselves with granular underwriting information and actuarially sound advisory prospective loss costs to guide pricing. Verisk offers a growing suite of products and tools to help insurers move quickly into a reemerging private market:

exclusive policy forms that closely align with standard homeowners coverage for greater consistency and ease of understanding
probabilistic modeling to assess and manage inland and off-floodplain risk
location-specific risk data through WaterLine, ISO’s new risk scoring tool for multiple flood hazards
claims management tools to save time, minimize errors, obtain usable reports, and expedite and refine claim estimates

Together, these tools can offer insurers greater control over their exposure to flood risk, their customer relationships, and their reputation in the face of whatever nature sends their way.