Flood insurance in 2023: More floods, reduced uptake unless action is taken

The past year was yet another that put America’s flood insurance system to the test.

In early September, Hurricane Ian wiped out large sections of Fort Myers and other areas across Florida in one fell swoop. The magnitude of the uninsured and underinsured devastation from flooding has once again exposed some of the flaws of our government-run flood insurance program, as did Ida in 2021, Harvey in 2017, Sandy in 2012 and Katrina in 2005 to name a few.

That said, 2022 brought some positive developments such as the decision by the Federal Housing Authority to accept private flood insurance, the culmination of what many see as a needless six-year decision-making process.

Major flood losses in 2022 brought heightened interest in and calls for reform of the National Flood Insurance Program (NFIP). This year also saw plummeting demand from voluntary flood coverage buyers who, but for the inaccuracy of NFIP flood maps, would be required to purchase flood insurance. The dramatic drop in what was a thriving housing market has pummeled the flood insurance sector as well. Add to that the NFIP’s continuing refusal to refund premiums when policyholders switch to a private market product midterm and 2022 will not go down in the history books as a great year for flood insurers, government or private. So, lets look back on 2022 and forward to what can we expect in 2023.

A look back 

Not surprisingly, Hurricane Ian was the “largest loss-causing event” of 2022 with estimated losses of up to $65 billion, according to a recent report from the Swiss Re Institute. The storm was the second-largest insured loss recorded, just behind Hurricane Katrina. FEMA reported in early November more than 44,000 flood claims related to Hurricane Ian and said they paid out almost $437 million in losses. The agency projected Ian-related claims to total up to $5.3 billion.

Though Ian was by far the most damaging flooding event of 2022, it wasn’t the only flood event. You may remember in May seeing a video of a home in the Outer Banks of North Carolina being washed away in a storm. Then, in late July, flood waters battered parts of Kentucky, taking 43 lives and destroying countless homes, businesses, vehicles and more.

Unfortunately, with these flood events, we also learned that the number of Americans with flood insurance continues to drop. NFIP data show total policies in force dropped nearly 4% from September 2021 to September 2022. This drop in flood insurance uptake is especially surprising given the fact that the partial implementation of the NFIP’s new risk assessment tool, Risk Rating 2.0, is expected to leave the NFIP’s average rate virtually unchanged. This will continue the long-established pattern of taxpayers paying about 50% of NFIP losses.

Under Risk Rating 2.0, some homeowners, particularly those residing in areas outside FEMA’s Special Hazard Flood Areas (SHFA), are seeing steep rate increases. Conversely, the NFIP is purposely gifting property owners who reside inside these SHFAs with artificially low rates instead of the rates indicated using more predictive Risk Rating 2.0 methods.

The continued implementation of Risk Rating 2.0 ­— through which the NFIP incorporates a pin drop (parcel level) approach to rating risk like the private market has done for years — was another positive for 2022. However, the NFIP’s decision to implement the new rate assessments over a 10-year period is a major negative. Under this timeline, more accurate rates will only be applied to half of NFIP policyholders after a five-year period, while the rest will continue to receive artificially low rates at the expense of taxpayers.

In 2022, the startling numbers of property owners hit by flooding, who did not have flood insurance, brought new attention to the issue of low flood insurance uptake and flood mapping. FEMA’s flood maps determine who is and who isn’t required to buy flood insurance if they hope to purchase the property with the help of a mortgage.

Unfortunately, the NFIP continues to impede the growth of the private market and the attendant benefits for consumers, taxpayers and the environment that the private market delivers. Even though it would be an easy change to make, the NFIP continues to refuse to make refunds to buyers who wish to buy a private market product prior to the expiration of their NFIP policy.

A look ahead

In 2023, Congress and the administration should look to remove the above-mentioned midterm cancellation rule. Under this rule, the NFIP keeps all unearned premium if a consumer chooses to cancel their NFIP policy in favor of a private market policy outside of the policy’s renewal window. This rule has served as a barrier to consumer choice for years. Now, with the housing market dramatically slowed, it is severely restricting the continued growth of the private flood insurance market. Why? One reason is because NFIP customers are essentially in lockdown until their renewal date. People typically only buy private flood coverage when purchasing a property or during a refinance transaction. Without the midterm cancellation rule, property owners would not be limited to buying private flood insurance at purchase, refinance or within a tiny renewal window; they could do so at the time of their choosing.

Second, the NFIP must develop better flood maps. Given recent events, this should be top of the list for the administration and the new Congress in 2023. As mentioned above, with Risk Rating 2.0, the NFIP is now using the same geocoding methods to rate risk as the private market. It should not be very difficult for the NFIP to use those same geocoding methods to update their flood maps to be parcel-level maps not horizontal shape file maps, allowing millions more Americans to better understand their flood risk as well as delivering a greater spread of risk, which always yields better results.

Finally, in 2023, we’ll hopefully see the NFIP move to implement its rate increases more quickly under Risk Rating 2.0 preventing the assessment of inadequate rates for years into the future. This practice not only deters competition from the private flood insurance market that would promote more consumer choice in flood insurance, but these artificially low rates also encourage developers to build in dangerous flood-prone areas, destroying natural habitats. It’s a practice that has also cost taxpayers over $44 billion.

For agents and brokers, changes like these could present a tremendous opportunity. Your clients want choices and they expect you to present the best options available to them. If these changes to our flood insurance system come to fruition in 2023, producers and their clients will benefit.

Craig Poulton (cpoulton@poulton.com) is chief executive officer of Salt Lake City-based Poulton Associates, LLC, which administers various catastrophe-related insurance products, including the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program.

Opinions expressed here are the author’s own.

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