Jonathan Hayes, Managing Director and John Kulik, Senior Vice President
- The U.S. insurance industry is actively seeking new opportunities for growth in a challenging market by identifying untapped customer needs. The potential flood market is over five times the size of the most often mentioned new market, cyber insurance
- Greater access to flood data and loss results and more reliable exposure modeling are enhancing the flood (re)insurance marketplace
- Several developments are helping carriers understand and monitor aggregation
Among all natural hazards, flood is the most costly and the most impactful on people (1). The Insurance Information Institute estimates that only 12 percent of homeowners purchase flood insurance (2), and most of the purchases are through the National Flood Insurance Program (NFIP). The gap in flood insurance protection represents up to a USD 40 billion (3) potential new market for private insurers in the United States, according to Jonathan Hayes, Managing Director, Guy Carpenter.
“The U.S. insurance industry is actively seeking new opportunities for growth in a challenging market by identifying untapped customer needs,” says Hayes. “The potential flood market is over five times the size of the most often mentioned new market, cyber insurance. PwC recently estimated the cyber insurance market may grow to USD 7.5 billion by 2020, but warned that some potential business customers question the value of the policies (4). The tools that the insurance industry uses to understand and demonstrate cyber aggregation of risk are in their infancy; there is much more understanding around surge and flood modeling.”
Careful consideration of several issues is necessary for companies contemplating entering the flood insurance market: Can companies understand the exposure and aggregation risk? How much coverage to provide? What is the risk of anti-selection? Will people buy flood insurance? How does one start?
“Greater access to flood data and loss results and more reliable exposure modeling are enhancing the flood (re)insurance marketplace,” commented John Kulik, Senior Vice President, Guy Carpenter.
Kulik explains that several developments are helping carriers understand and monitor aggregation:
- Coastal surge is included as a sub-peril in hurricane models; modelers understand that flood is excluded from homeowner policies but allow the carriers to determine how much flood damage is paid due to difficulty in making the wind or flood determination.
- Inland flood models are now developing in the United States, supported by reasonable scientific understanding of riverine and precipitation patterns that underpin the dynamics of catastrophe models.
- All major catastrophe model vendors offer a U.S. flood product and are working to complete any missing gaps in perils. Their models cover inland flood, hurricane surge and river flooding.
“Historically, there appears to be consumer reticence to buying flood insurance. The Wharton School has a reasoned view (5), suggesting that mandatory flood insurance inside the standard homeowners policy is the most direct way to both get to the available market and avoid anti-selection,” continues Hayes. “But with homeowner rates under scrutiny in most states, price increases for flood coverage are likely to create stresses for politicians and elected insurance commissioners – even a mandatory coverage may not be feasible.”
Kulik concludes, “The risks of both coastal surge and inland flood are better understood than ever before and much work is still being done to bring extra clarity. Current tools to monitor and control risk accumulations map readily to flood applications. The market is massively under-penetrated and homeowner awareness of flood concerns post Irma/Harvey is increasing.”
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1. Miller, S., R. Muir-Wood and A. Boissonnade (2008). An exploration of trends in normalized weather- related catastrophe losses. Climate Extremes and Society. H. F. Diaz and R. J. Murnane. Cambridge, UK, Cambridge University Press; Stromberg, D. (2007). Natural Disasters, Economic Development, and Humanitarian Aid, Journal of Economic Perspectives, 21(5): 199-222.
3. Estimating USD 6-7 billion adequate FEMA premium, 25% purchasing, USD 7.5 billion non-SFHA HO market, 10% for private insurance coverage differential plus commercial flood market.