The private flood insurance market is small but could grow with the new NFIP rating: AM Best

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The nation’s flood insurance market is slowly shifting towards private insurers offering additional options to the federal government’s program for those seeking coverage, according to a new report from AM Best.

But private sector carriers are selective, tend to avoid risk in flood-prone areas, and focus more on commercial properties than owners, according to a report by AM Best.

According to Best’s market segment report, “Flood Risk Appetite Among Private Insurers Still Low,” over 70% of the overall private flood premium was generated by exposures to commercial properties.

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The report also finds that private insurers tend to avoid flood-prone areas, noting that Florida experiences tropical systems more frequently than any other state and accounts for about a third of the total insured value of the National Flood Insurance Program (NFIP). . Yet Florida only accounts for about a quarter of the total flood premium, partly illustrating the larger problem that NFIP is subject to an inherent risk of adverse selection.

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“If private insurers are able to price risks individually, they will select the best risks with better pricing than the subsidized NFIP rates, which will result in additional adverse selection,” said Christopher Graham, senior industry analyst at AM Best.

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The NFIP still bears the heaviest burden in the U.S. flood market, but private flood insurers generated nearly $ 3.1 billion in total direct premiums during the 2016-2020 period. The $ 735 million in direct bonuses in 2020 was the highest amount during this period.

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The slow move towards greater private sector involvement comes at a time when the federally-run National Flood Insurance Program (NFIP) recorded a shortfall of $ 20.5 billion earlier in the year, a figure that includes losses from Hurricane Katrina in 2005.

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The NFIP is administered by the Federal Emergency Management Agency, which developed Rating 2.0, a strategy to address pricing inefficiencies and reduce any adverse risk selection by moving all properties to a true risk-based rate. The new NFIP pricing structure is expected to come into effect on October 1, 2021.

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Under the 2.0 risk rating, the annual premium rate is expected to drop for a quarter of policyholders covered through the NFIP. However, many will see their rates rise and reach their full risk rate in about five years. Ultimately, the new rating measures should lead to more adequate pricing of NFIP risks and more competitive coverage offered by private insurers.

Higher premiums for federal flood insurance, according to Best analysts, “should make the pricing of private insurance more competitive” and encourage more policyholders to turn to the private market.

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“This should help to better distribute the risk of flooding between private carriers and the NFIP, as well as create a better overall market for flood insurance for customers in need of the coverage,” said David Blades. , associate director, AM Best.

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NFIP’s authorization is currently due to expire at the end of this month, unless Congress acts to renew it.

In recent years, Congress has not been able to pass reform legislation or a long-term extension of the NFIP, but has instead passed a dozen short-term extensions. Last year, President Donald Trump signed a one-year extension passed by Congress just before the NFIP expired.

Source: AM Best

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Flood Market Trends AM Best

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