Demand for private flood insurance may increase as the cost of government-subsidized insurance rises, but Fitch Ratings is doubtful that coverage offered by either insurers or capital markets investors would be affordable.

The private insurance market does currently provide coverage for flood risk, but it is generally limited to commercial flood policies and excess homeowners flood coverage above the maximum $350,000 of building and contents coverage provided by the National Flood Insurance Program (NFIP).

While private insurers (and reinsurers) have the capacity to provide coverage for flood risk, they would need to be able to charge actuarially sound rates to be willing to write significant amounts of risk, Fitch said in research published today.

“Flood has traditionally been viewed as an uninsurable risk, requiring the need for a government solution to cover the flood exposures of individual property owners,” the report stated. “However, more sophisticated risk mapping and modeling tools have been developed in recent years, so that the private industry is more willing to provide coverage and able to more accurately price the risk.”

In recent years, the U.S. government has provided an unprecedented level of support for flood losses, prompting it to look for ways to reduce this risk. The NFIP has accrued $24 billion of debt due to flood insurance claims from Hurricanes Katrina and Rita in 2005 ($22 billion), Hurricane Ike in 2008 ($3 billion), and most recently Hurricane Sandy (about $15 billion) in 2012.

The Biggert-Waters Flood Insurance Reform Act of 2012, which was passed before Hurricane Sandy, reauthorized the NFIP for five years to Sept. 2017 but also phases out the federal government's support for flood insurance policies.

However concern about increased premiums that would result has caused Congress to reconsider implementing the legislation. This concern has also led several states, including Florida and West Virginia, to advance legislation to increase the availability of private flood insurance.

While Fitch believes that private flood insurance may be prohibitively expensive, the cost of offloading all kinds of risk in the capital markets has been falling.  

State insurance agencies such as Florida Citizens and Louisiana Citizens Property Insurance have successfully leveraged demand for hurricane risk, especially from capital markets investors, to lower both their cat bond and reinsurance rates. Rates on these kinds of wind-related deals have fall dramatically over the last few years, as institutional demand for catastrophe risk has ramped up. That dynamic is likely to continue across insurance-linked securities based on different perils and could enable flood policy premiums to drop to more acceptable levels.

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