Could Private Companies Save the Flood Insurance Market?

Despite ongoing rate increases, the NFIP is drowning in debt. Could private flood insurance companies save it?
Sunken house

Summer may be just around the corner, but hurricane season is already here. Friday marked the beginning of the 2018 Atlantic hurricane season, and up to 14 named storms—including six hurricanes—are on their way, according to Philip Klotzbach of Colorado State University.

In preparation for this season, FEMA announced in April that it was increasing rates for its National Flood Insurance Program (NFIP) by an average of 8%, with additional increases to come next year.

However, the NFIP owns a crushing $24.6 billion of debt, and the announced rate increases likely aren't enough to buoy the program. "If you look at 2017, some of the largest payouts in NFIP history occurred after hurricanes Harvey and Irma," said Michael Barry, spokesman for the Insurance Information Institute. "The 8% increase is modest given the magnitude of the flood insurance payouts just last year."

That's why some, including Barry, would like to see private flood insurance companies to enter the market.

What role could private insurers play?

Barry believes the continued entrance of private insurers into the flood insurance market could help stabilize both the NFIP and property owners' policy rates.

As the industry recovers from last year's losses and the globe continues to experience volatile weather patterns, policyholders will likely be unable to avoid modest rate increases. However, according to a recent study by actuarial firm Milliman, private insurers in high-risk areas in Texas, Florida and Louisiana could provide cheaper flood insurance coverage than the federal program. Furthermore, the NFIP could benefit from private businesses taking on some of the nation's flood risk.

"Consumers should welcome the entry of private flood insurers," said Barry. "For many years, FEMA's National Flood Insurance Program was the only game in town. It's possible that having a viable competitor out there will be beneficial to consumers."

Barry suggests that private insurers could prove especially useful to homebuyers if the NFIP expires—as it has several times in the past. For example, if you're trying to close on a home located in a special flood hazard area, your lender will require you to carry flood insurance. If the only flood insurance available in your area is offered by the NFIP and Congress has allowed the program to expire, your closing could be delayed until the program is renewed. However, with private insurers available in the region, homebuyers would have additional options to fall back on.

Currently, most homeowners insurance companies that do sell flood insurance are merely brokering NFIP-backed policies, so their rates and coverage are similar to that offered by the federal program. Still, by bundling your flood insurance and homeowners policies under the same company, you may qualify for a discount. Additionally, a few true private flood insurance companies do exist, such as TypTap and Florida Peninsula, and they may offer more competitive rates.

Homeowners and potential homebuyers should compare quotes from several insurance companies, as well as the NFIP, in order to find the best and most affordable coverage in their areas. And they shouldn't wait to do it. There is a 30-day waiting period before new flood insurance policies take effect, meaning if you begin your search for flood insurance at the beginning of June, the earliest you could gain coverage would be early July—well into this year's hurricane season.

Chris Moon

Chris has been with ValuePenguin as a research analyst since 2016, providing homeowners with detailed coverage of financial topics ranging from mortgages to home insurance policies. He has contributed insights to publications such as the New York Times.

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