Closing flood protection gap requires changing public perception: Experts

By Alex Zank, Advisen

To close the multi-billion-dollar U.S. flood protection gap, the insurance industry must change the widely held public perception that only the most at-risk need to buy a policy, say industry experts.

“We are addressing what we think is a national problem,” Nick Steffey, chairman and CEO of ShoreOne, an insurance carrier that provides flood coverage as part of a single homeowners policy, told Advisen. “There is a big gap, we believe, in the United States for flood insurance.”

Flood risk is growing and changing from decades past. Global insured flood losses grew from roughly $30 billion in the decade between 1991-2000, to $70 billion in 2011-2010, to $105 billion in 2011-2020, according to a 2022 Swiss Re Institute sigma report. Experts who spoke with Advisen also noted that flooding risk due to heavy rainfall is expanding, and “traditional” flood risk from overflowing streams and lakes may become less prevalent.

Matt Junge, head of property underwriting, U.S. regional & national at Swiss Re, said the reinsurer estimates a $36 billion flood protection gap in the U.S.

“It is one of the most common perils that seems to be causing an increasing amount of damage that is yet to be fully addressed,” Junge said in an interview. “I think a lot of folks, not just in the insurance industry but within the U.S., would say it just doesn't get the attention it deserves.”

Shifting aggregate flood-risk perception requires buy-in from all parties involved in the homebuying process, including real estate agents, mortgage lenders, and insurance agents. All three players typically base their flood-risk advice on whether a property falls in a high-risk zone, said Junge.

However, that may not reflect the true risk because where there is rain, there is risk of flooding.

“I think what we’ve got to look at now is the changing nature of the peril, and how we communicate more broadly,” Junge said. “It’s a lofty goal, but it involves the whole value chain.”

Property owners suffer from two big misconceptions on flood risk, according to Donald Griffin, department vice president and project coordinator at the American Property Casualty Insurance Association.

“One is that their homeowners policy covers flood, which it doesn’t,” he said. “The second one is that, if their mortgage lender doesn’t require it, they don’t need it, and that’s not correct either.”

The industry’s biggest challenge is convincing homeowners they need flood coverage even if they’re not in a high-risk area, said Cameron Rhodes, president and COO of ShoreOne. Homeowners who have experienced major storms, such as 2012’s Superstorm Sandy, are “well aware” of their risk. It is up to insurance agents, those who directly work with customers, to explain the importance of flood protection to those skeptical of the need for a policy.

“I think you’re obviously going to have people who don’t think that their home could flood under any circumstance,” Rhodes said. Lower risk should equal lower premium, he noted.

Experts also pointed to shortcomings of federal flood cover -- the National Flood Insurance Program (NFIP) covers a home’s cash value rather than replacement costs, Steffey commented.

Federal lawmakers need to bring stability to NFIP by passing a more permanent reauthorization of the program, according to Griffin. Lately, they’ve extended the program by just months at a time. This is problematic because the industry is “not always sure what Congress is going to do to reform or not reform the program,” he told Advisen.

The U.S. Federal Emergency Management Agency, which administers the NFIP, implemented its Risk Rating 2.0 program in 2022. The program charges variable rates based on a property’s individual risk and “is creating an opportunity” for insurers looking to write private flood coverage, Griffin said.

“The key for a lot of these companies is trying to figure out where I might be able to market my product and to whom so that I can make sure that my company is viable, so I can pay the claims I need, and that I am able to maintain my business and grow it,” he said.

The time is right for expansion of the private flood market, experts say. The insurance industry better understands flood risk due to advances in mapping technology, Junge said.

“The advancements in technology are why the private market is able to enter the private flood space in a more meaningful way than we ever have before,” he said. “For an insurer to be able to offer a product, they have to be able to understand that risk and turn that understanding into a price and underwriting guidelines.”

But it requires more than insurers’ understanding of flood risk to close the protection gap. Property owners must boost their understanding as well.

ShoreOne’s Steffey summarized the challenge: “We need to create a public awareness that every home in the United States should have a flood quote, and we believe that the risk is much greater than the current number of homes insured.”

Reporter Alex Zank can be reached at alex.zank@zywave.com