The Changes Underway in the Flood Insurance Market

Flooding is the number-one natural peril in certain advanced markets, superseding wildfire and storm. Millions of properties are at substantial risk – and frequency and severity of floods on the rise. Still, gap in flood insurance is inordinately high, with <5% of exposed single-family homeowners in US having coverage. Globally since 1980, flooding accounted for ~40% of loss-related natural catastrophes, with losses totaling US$1 trillion. Per Munich Re, a mere 12% of losses were insured. The flood insurance market was valued at US$9.03 billion in 2019 and is projected to reach US$27.31 billion by 2027, at a CAGR of 14.84% during 2020-27. Historically, flood insurance has been unprofitable or unaffordable in high-risk areas which demanded government intervention.

Flood damage is excluded under standard homeowners and renters policies. Coverage is available as separate policies from government programs and from private insurers. National Flood Insurance Program (NFIP) covers 22,000+ US communities, with nearly half a million policies and US$1.3 trillion coverage. The number of private carriers have more than doubled in last 3 years leading to improved competition and spreading of economic risk. They offer higher coverage than NFIP policies, currently capped at $250,000 for residential and $500,000 for non-residential buildings. Large writers of private flood include FM Global, Assurant and Zurich Insurance. In 2019, net premiums written for US private flood insurance totaled US$522.6 million, up 45 percent from US$360.1 million in 2018.

When Hurricane Harvey struck Houston in August 2017, nearly 83% flood victims were uninsured because they lived outside most vulnerable flood zones and weren’t required to buy flood insurance. With no insurance, they had to pay for damages out of pocket. In the “state-of-flood-risk” report from First Street Foundation, about 14.6 million properties at high risk were identified, of which 5.9 million property owners were unaware as they were outside danger zones.

Flood, a high-gradient peril, is probably among the least understood. Complication arises due to various forms of flooding, such as surges from hurricanes, tropical depressions etc. Interestingly, flood models have evolved over the past few years owing to increased computational power and take into account the changing climate, such as what a surge would look like with increased sea levels and impact of hurricanes in other regions.  Technology has come a long way in capturing important parameters for flood underwriting, such as topography, location accuracy and building characteristics. Geocoding and location accuracy have improved substantially with AI/ML techniques.

Partnerships in flood insurance have been growing. Recently, Swiss Re entered into a strategic partnership with  commercial satellite operator and flood monitoring provider ICEYE,  to advance flood risk management, assist disaster response and accelerate payments. Neptune Flood, an AI driven flood insurer, partnered with Plymouth Rock Assurance, an auto and home insurance provider. A Lloyds coverholder, Neptune has also increased capacity at Lloyds via new strategic underwriting partnerships. Previsico, a live flood forecasting insurtech is part of Lloyds Banking Group and develops solutions for flood resilience.

Some insurtechs such as FloodFlash offer parametric insurance, based on state-of-the-art sensors that are installed outside insured properties. When sensors detect a flood, they send notifications and payouts are automated. The policy doesn’t use loss adjustors to assess damage, so there are no delays. Other prominent insurtechs in flood insurance include: Cloud to Street, Leakboy, TypTap, FloodMapp, Flo, OKO, True Flood Risk.

Flood insurance has often been considered a nuisance product by homeowners and insurance agents tend to be reluctant to sell to clients. It can be a hard sell, but it doesn’t have to be. Private players are growing and innovations such as online marketplace Realtor.com that shows whether a home is in a FEMA flood zone and provides a First Street Foundation flood risk report, give prospective buyers a better view of a property’s overall flood risk to take informed decisions.

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