Hundreds of thousands of homeowners have abandoned flood insurance since the government revamped the federal coverage guidelines late last year, but the door may be opening for more private insurers to fill the growing gap.
Changes in the National Flood Insurance Program, which insures more than 4.5 million homes and businesses, were designed to make policy pricing more accurate based on risk levels, and cut subsidies. Many homeowners saw premiums fall as a result, but others were hit with huge premium increases, with some policies ballooning six times their average annual $700 premium, according to First Street Foundation, a nonprofit research organization that quantifies and communicates climate risks.
By some estimates more than 400,000 U.S. homeowners have simply given up on coverage just as the Federal Emergency Management Agency and climatologists have warned that high risk flood areas will likely increase by 55% along coastlines and 45% along rivers and streams by the century’s end.
“Everybody lives in a flood zone.” — Ashley Tozo, flood practice leader for Insurance Office of America
“Everybody lives in a flood zone,” said Ashley Tozo, flood practice leader for Insurance Office of America. “You hear people say they’re not in a flood zone. But they are. It's just a matter of whether FEMA has deemed it a high-risk flood zone or a low risk flood zone.”
Tozo said FEMA recently reported that about 40% of its claims came from policyholders in low-risk zones.
Flood insurance has long been the provenance of the federal government because private insurers found the risks unpredictable and claims high. Taxpayers, however, subsidized the government flood insurance program as did policyholders in low-risk areas who paid nearly the same rates as those in high-risk regions. Hurricane Katrina and the Sandy superstorm nearly bankrupted the federal insurance program. The changes introduced last October are meant to bring accurate underwriting to program in an attempt to fairly price the product and make it more affordable. It hasn’t all worked out that way.
“They're adjusting the rating methodology for the National Flood Insurance Program,” said Tozo. “It's going to cause a lot of shaking up. It's supposed to create more balanced premiums so that people that are higher risk are paying the higher premiums and the people that are lower pay less.”
Tozo said, however, that as subsidies disappear and actuarial premiums are phased in, it will invite private insurers to compete.
“Once we start to see that happen, where people are no longer getting the subsidies, you're going to be able to put the private insurance quote next to NFIP quote and they can actually compete,” she said. “That's where we're heading.”
Moreover, Tozo said, insurers may begin to offer coverage for things NFIP does not, such as moving expenses, food allowances, and other construction repair not normally covered by government programs. Private lenders and mortgage companies, which now typically insist homeowners purchase from the NFIP, may broaden their rules to allow in more private carriers.
“In order for a private insurance company to be interested in writing flood insurance, they, at a minimum, have to break even,” she said. “So, if you're trying to compete with FEMA, which is in debt, you're never going to get a competitive price, because you're going to be losing money. So once they're able to actually balance the pricing of NFIP and the risk is more accurate, covering for floods would be the same as any other type of risk.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].