The Risks of Hazard

Last week, we wrote about that NYT article that was the buzz of the flood community. As might have been expected, it created a little buzz. Below the line, an interesting conversation took place about flooding depths, BFEs, and how they relate to each other. There are a few thoughts in that commentary that are worth a deeper look this week. But first, a quick thank you to Christopher and Scott for their comments!

Inevitably, let’s check out Houston and Harvey. It’s not the first time we have looked at Houston (or the second, third, or fourth), because Harris County is the flooding capital of the Americas. Forget about 500 year flood zones – Houston has 6 month flood zones.

 Last week the American Academy of Actuaries released a paper on flood insurance: The National Flood Insurance Program: Challenges and Solutions. April has provided a motherlode of excellent material on flood insurance, including the study from the CIPR: Flood Risk and Insurance, which we explored last week. Let’s check out the Academy’s monograph (a nice synonym for “study” or “white paper”, isn’t it?).

As the title states, the monograph is concerned with describing challenges the NFIP must confront, and solutions for them. The monograph (that really does sound good, doesn’t it?) is 96 pages, so we are going to heavily summarize the key challenges and solutions – but do note that the paper is absolutely worth a close reading or two.

Here are the key challenges, according the Academy, verbatim because they are so clear:

• The inherent contradictions in NFIP mandates. The NFIP is tasked with both achieving solvency and making coverage widely available at “affordable” rates, policy goals that may not be simultaneously achievable.
• The non-insurance activities of the NFIP. The NFIP performs a number of tasks in the public interest, such as promulgating maps, encouraging smart land use policies and building codes, and reducing the public’s dependence on post-event disaster assistance. The benefits of such tasks are not directly measured in the NFIP’s financial results from underwriting flood insurance.
• The NFIP’s interaction with other federal budget functions. The activities noted in the prior bullet point affect federal outlays in other areas such as disaster assistance or infrastructure investment to protect properties. A holistic view of the NFIP’s value needs to consider these functions.
• Changing hazard over time. The concern of rising sea levels illustrates the importance of looking at NFIP finances over a multi-decadal time horizon. Such long-term analysis is used by Congress in social insurance programs such as Social Security and Medicare.
• The impact of technology on what is possible to underwrite in the private market. Improvements in data and modeling tools have significantly improved the ability of private insurers and reinsurers to underwrite flood risk. The need for clarity around NFIP funding sources for it to compute actuarially sound rates. Actuarial standards and principles promulgated to guide ratemaking for private entities may not be completely relevant for public programs such as the NFIP, largely due to access to funding sources such as the ability to borrow from the Treasury and/or other means of post-event financing such as debt repayment surcharges. Addressing probability of sufficiency issues would mitigate this issue.

Last week, the Center for Insurance Policy and Research (the research arm of NAIC) ran a panel discussion on Flood Risk and Insurance in Denver at the NAIC spring meeting. The panel discussion was in tandem with the release of their new study, Flood Risk and Insurance. Both the panel and the study were celebrated as successes in the room – and I’m not saying that just because I was an author of the study. The panel discussion featured a few real highlights for me:

Did anyone reading the Intelligent Insurer last week notice their Most Read highlights? Here it is from November 15:

I don’t know if it was intentional or not, but they made a perfect microcosm of an interesting and important debate resounding through the corridors of insurance conventions.

Both articles are behind the subscription wall (to which I don’t have a key), but the blurbs illustrate the point brilliantly.

The first article is from an interview with Arno Junke, CEO of Deutsche Rück, and he cautions against becoming “obsessed with developing new products driven by technology and fears of competition from new entrants.”

Meanwhile in the second article, Florence Tondu-Melique - European COO of Hiscox, cautions that “digitally-focused new players in the insurance industry are increasingly threatening the market dominance of traditional insurers in a dynamic that could ultimately force the incumbent players to become nothing more than risk carriers.”