Flood insurance redesigned: Regulatory considerations for a viable and sustainable private market

Abstract

Several factors have converged in recent years, bringing the need for admitted-market, private flood insurance options in the U.S. to the fore. Meanwhile, other factors have coincided that make modeling and pricing large segments of the U.S. flood risk exposures more accessible and more accurate than was historically possible. The National Flood Insurance Program (NFIP), despite recent rating reforms, faces daunting financial and market challenges. The U.S. flood risk has increased: The risk of severe flooding and the cost of such events continues to grow. Flood loss models that can support granular pricing are now commercially available, outperforming the Federal Emergency Management Agency’s (FEMA’s) flood maps historically used for rating and loss mitigation purposes. Several states have begun encouraging admitted insurance markets to provide flood insurance in addition to the NFIP and the excess and surplus lines coverages already available. This paper examines the private market opportunity and challenges, highlights state-level strategies, and demonstrates the importance of flexibility in program legislation and regulation—with respect to both program design and implementation. Our work contributes to the literature by: 1)exploring the market challenges in the development of private flood insurance; 2)demonstrating the importance of local risk considerations and flexible program features for state-level, private strategies that provide a sustainable framework for insurers to consider; and 3) highlighting the alignment of recent model laws and several state programs with the recommended features.