- Chicago, IL
From California, through a large swath of the central US, to the Eastern Seaboard, flooding is on the rise In fact, about 44% of the continental US is at risk of flooding, according to the National Oceanic and Atmospheric Administration (NOAA).1
An increase in flooding means an increase in flood losses, which has more residents and business owners looking to purchase Flood insurance. It also has insurers reevaluating the extent of their risks.
"Insurers are taking a deep dive into their exposures to determine their rate adequacy," says Nick Orf, RPS area assistant vice president, Flood.
Shopping for Flood Insurance in the Commercial World
On the commercial side, some insurers that offer all-risk coverage in their Property programs are reducing flood limits or are no longer offering Flood insurance in their policies.
"As a result, we are seeing a spike in requests for monoline Flood insurance for commercial risks," Orf says.
While the Federal Emergency Management Agency's (FEMA's) National Flood Insurance Program (NFIP) can provide businesses with coverage, limits are capped at $500,000 per building and $500,000 for contents. For that reason, Orf explains, "Commercial clients that require higher limits and/or coverage for their loss of income exposure — which the NFIP doesn't provide — look to the private and excess markets."
In addition, carriers that focus on large commercial accounts are scaling back their overall exposure.
"Insurers don't want to be overexposed on any one account or in any one area," Orf says. In previous years, carriers provided limits of $10 million or higher; however, with most carriers deploying less capacity on any given account, available limits are now from $2.5 million to $5 million.
"It now takes two or three carriers to build up higher limits," says Orf.
Then come regional issues, on top of that. Carriers are restricting their appetite in geographic areas such as California and Florida due to their loss exposure. Insured losses from floods in California as of January 2023 were estimated between $500 million and $1.5 billion, including losses to the NFIP and private flood market, according to Moody's RMS.2
The Mixed Effects of Risk Rating 2.0 on Flood Insurance Premiums
Beginning in October 2021, the NFIP changed the way it calculates Flood insurance premiums with FEMA's Risk Rating 2.0 program. The changes, implemented two phases, include the following:
- Premiums will reflect an individual property's risk, including structural variables such as the type of foundation, the height of the lowest floor of the structure relative to base flood elevation and the replacement cost value of the structure.
- Premiums will reflect more types of flood risk in rates.
- The latest actuarial practices will be used to set risk-based rates.
The idea behind the changes is for rating to be more equitable, so that higher-valued properties pay higher premiums because it costs more to replace damaged property. Since the implementation of Risk Rating 2.0, some homeowners have seen premium increases while others have seen decreases.
"It's also been easier for individuals to secure NFIP quotes, as they are no longer required to submit an elevation certificate to get coverage," says Orf.
However, "over the last two years, FEMA has received a great deal of feedback on the new rating program," ORF notes "The results are mixed, with recommendations submitted to FEMA and lawmakers to consider. Among the feedback provided by some groups and non-profits are concerns that the rates for lower-income households haven't sufficiently decreased, with calls for more equitable rating across the board."
Private Market vs NFIP
Both the NFIP and private Flood insurance market can provide similar coverages; although, as mentioned, private market policies can provide higher limits and offer business income coverage.
"In addition, it's possible to insure multiple properties on a single policy through the private market," says Orf, "whereas the NFIP requires you to have separate policies for each property."
The private market also develops its rates differently from the NFIP, with each carrier using various risk modeling platforms, he continues.
"Generally speaking, the NFIP is a bit more competitive in the higher-risk A and V flood zones while the private markets are generally more competitive in Zone X. Also, the federal program typically has lower deductible options for primary coverage. Often insureds obtain NFIP primary coverage and then have private markets provide excess limits. Pairing NFIP and coverage through the private market is one way to achieve higher limits if an insured needs them."
With flooding becoming a more dominant issue across the country, it's important to stay informed so you can advise your clients on their options. Never fear, though: RPS is always here to share our knowledge and help you find ideal solutions.
1"Spring Outlook: California Drought Cut By Half With More Relief to Come," National Oceanic and Atmospheric Administration's (NOAA) , 16 Mar 2023.
2"Moody's RMS Estimates US$5-7 Billion in Total U.S. Economic Losses from California Flooding," Moody's RMS, 25 Jan 2023.