The Rising Waters of Flood Insurance Premiums

After Hurricane Ian, the National Flood Insurance Program (NFIP) could be under-reinsured, according to an AM Best report on Friday. Ian is estimated to have caused damages reaching as high as $7 billion – far exceeding its reinsurance attachment of $3 billion. According to CoreLogic, Hurricane Katrina caused about $16.1 billion in insured losses, leading to the highest ranking as the costliest disaster in the history of the National Flood Insurance Program.  Experts expect to see overall flood losses from this storm to reach even higher levels than those experienced after Katrina.

In response to these losses, an increase in private flood insurance premiums has led many homeowners to purchase the policy through the federal government’s National Flood Insurance Program (NFIP). Last year, 862,000 residential primary policies were in force and average annual premiums were $3,218. Actual average annual premium rates paid by Florida homeowners are likely higher due to policies with subsidized rates. NFIP is subject to very expensive taxpayer subsidies, but as premiums generated by risk-rating 2.0 continue growing, so will these subsidies.

Risk Rating 2.0 is the new national flood risk rating system that calculates the financial exposure of homeowners, businesses and communities at risk. To determine this, the insurance industry uses large sets of public and private loss data to calculate how much a property can be expected to sell for in case of a disaster, plus an estimate of total rebuilding cost after a disaster. The system is currently being rolled out nationwide, but already has had an impact as premiums have increased by as much as 35% for some people in certain areas. Premiums are capped at an 18% annual increase, however the long term outlook for full actuarially sound rates is not expected to be achieved for another four years. 

References:

https://www.insurancejournal.com/news/national/2022/11/28/696637.htm