Increasing Storm Frequency Could Shock The Private Flood Insurance Market

Hurricane season has only begun, but the U.S. has already had two historic storms that left behind destruction, displaced thousands and racked up millions of dollars in damage. And that was all within one week. 

Two Category 4 Atlantic hurricanes had never made U.S. landfall during the same year until hurricanes Harvey and Irma hit Texas and Florida. Building owners and insurance companies had no time to collect themselves and assess the damage from Harvey before Irma made an appearance. While the insurance industry is financially capable of covering a large-scale event, multiple disasters in short succession could have a significant impact on both premiums and the availability of private flood insurance. 

Franklin Street Insurance Services Managing Director Matthew Harrell has begun to advise clients to prepare for rising premiums after a sustained period of decreasing rates. The insurance marketplace was capitalized to sustain a $100B event, he said. While Harvey, Irma and Maria were not of that scale individually, the combined insured loss estimates of all three is more than $150B.

"The frequency of these storms is making carriers question if this is the new norm," Harrell said. "Carriers may need to increase their premiums to account for this increased frequency.” 

Like Hurricane Katrina and Superstorm Sandy, Harvey, Irma and now Maria have highlighted the nuances of what damage insurance policies cover. Insured damage totals from Maria, the latest storm to tear a path of destruction through the Caribbean, are predicted to fall between $40B and $85B. This excludes flood damage covered by the National Flood Insurance Program. 

Many property owners assume their policies will provide coverage for all losses caused by a hurricane, but that is not always the case. Standard property policies only provide coverage for damage caused by wind, not flood. Yet flooding accounts for the majority of the damage caused by hurricanes, Harrell said.

“Almost two-thirds, if not more, of hurricane damage, is caused by flooding, but historically when you think of hurricanes, you think of wind damage,” he said. “The insured losses for wind damage are not as significant as you would think.”

This creates a significant coverage gap for many property owners who are not purchasing flood insurance. For example, approximately 70% of the flood damage from Hurricane Harvey is uninsured, Harrell said. 

In Houston, where 27% of gross leasable area in the metro area may have flooded, many properties were outside of the 100-year flood plain, where there is a 1% chance in any given year that an area will flood.

Property owners in the 100-year flood plain are most likely to purchase flood insurance, as it is a standard lender requirement, but those owners outside of high-risk areas are less inclined to do so. Purchasing flood insurance based on whether a property is in a high-hazard flood zone contributes to a large number of uninsured flood losses.

Flood risk maps, established by the Federal Emergency Management Agency, do not account for contributing factors such as adequacy of drainage, which has been the cause of half the flooding in Harris County, Texas, over the years.  

Houston’s development boom in particular replaced wetlands with concrete, which some critics argue limited water absorption, exacerbating the damage. 

“I’m already seeing an increased demand for flood coverage from clients that are outside of the 100-year flood plain, which have decided to not purchase flood insurance in the past,” Harrell said. “Within the past two weeks, many clients have already contacted us to find out the cost to add flood coverage to their policies midterm.” 

Harrell works with commercial property owners, who have the ability to purchase flood coverage through both the NFIP provided by FEMA and the private insurance marketplace. The former is a federally regulated program and is consistent in its availability, provided the government continues to reauthorize its spending. 

While the NFIP covers physical damage to the building, it does not cover loss of rent for commercial properties, should tenants have to move out during repairs.

Limits also vary between residential and commercial properties. For a residential property, the most an owner can purchase is $250K, whereas on a commercial structure, the cap is $500K. The NFIP can create gaps in coverage for properties valued higher or that generate income. The private insurance market can help fill those gaps.

But as more owners begin to seek flood insurance, prices will rise.  

“Increases are coming,” Harrell said. “We are coming out of a trend of five consecutive years of double-digit rate decreases. Property owners are used to decreases, and now we are coming to the point where it is going to start moving in the other direction.” 

Harrell said property owners can minimize the financial impact of this uncertainty by properly budgeting for these expected increased insurance costs next year. Owners should also quantify their hurricane deductible exposure and consider reserving funds to cover them in future years. They should also focus on improving wind mitigation features in their buildings, which can result in significantly lower premiums.

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