Over the past year, flood and flood insurance has really become more apparent in the media and trade publications. Normally only catastrophic events (i.e. hurricanes) capture so much attention, but the combination of some massive floods and the continued progress of private flood legislation has started conversations that are overdue. Both the nature of these storms and floods, and their impact on property owners are getting close attention, and that is welcome because it is changing the way people think about underwriting flood insurance.
©2016 Roger Pottorff. All Rights Reserved.
In the past two weeks, there have been two articles published that illustrate such changes of perception.
The first is from Jeri Xu of Swiss Re, and she offers a very useful way to think of the rain events that have caused some of the most serious recent floods (i.e. 2016 Texas, West Virginia, Maryland, and Louisiana). She offers an angle on these events that is potentially transformative for evaluating flood risk: since flood-causing storms are localized at the county-level (roughly speaking), and there are about 3,000 counties in the country, it is not unreasonable to expect three 0.1% annual probability floods in any given year. In other words, we should expect three thousand-year-floods annually. With this insight, Ms. Xu has transformed the extremely rare to the commonplace, and reconciled the headlines with the stats.
The second is from David Bull, North America Editor of The Insurance Insider, specifically about the recent Louisiana floods. He has tracked down the 0.1% annual probability of the rain that caused these floods, ensuring his article is apples to the Swiss Re article’s apples. Mr. Bull writes about the profound protection gap in Baton Rouge and Lafayette for flood, quoting all the ugly stats about how most of the property that has been flooded is uncovered for it: “Across the Baton Rouge area, no more than 15 percent of homes have flood insurance, while Lafayette, also hard-hit, has a take-up rate of 14 percent.” The reason for this sorry penetration of flood insurance is the same as always: “many of the areas flooded were outside the 100-year floodplain and not considered at high risk.” Mr. Bull has shown the obvious need for a new form of flood insurance.
That last quote is the key to a new way of thinking of flood risk. Here it is again, to ensure it resonates deeply: “many of the areas flooded were outside the 100-year floodplain and not considered at high risk.” Using the perspective furnished by Ms. Xu, we should expect that 1000-year floods will happen every year, somewhere. Based on that conclusion, the “100-year” floodplain is clearly not the right way to define “high risk”, just as Mr. Bull made clear.
Ms. Xu and the headlines are teaching us to stop wondering when a serious flood is going to happen – it is way more important to understand where the damage will be when the serious flood does happen.
The 100-year floodplains on FEMA’s FIRMs clearly do not help underwriters (or homeowners) understand flood risk – indeed, the FIRMs were never intended for that, as they are rate maps, not risk maps. Instead, underwriters need information that will help them understand the likelihood of a specific property flooding when it does flood, because the flood is coming, somewhere.
It has been long written about how flood losses occur beyond flood zones. Looking at flood risk by where, not when, is an effective way for underwriters to handle this fact. More importantly, it is a view of risk that supports the creation of private flood insurance products for the US, because it is unacceptable to have 85% of damaged homes (in Louisiana of all places) without flood coverage.