Hurricane Irma has placed flooding firmly back on the agenda for Florida. Irma did affect the entire state and flooding was widespread, affecting areas from Brickell in Miami’s financial district, to the northern counties. With dire storm surge forecasts predicted for the Gulf Coast, a new storm surge record was set in Jacksonville, but places such as Tampa, St. Petersburg, Naples, and Fort Myers experienced shallower flood depths than the predictions.
Florida homeowners are more aware of flood risk than most — and are well versed in buying flood insurance. For those who live in high-risk flood areas and have a mortgage from a federally regulated or insured lender, it is a mandatory requirement to purchase flood insurance from either the National Flood Insurance Program (NFIP) or alternatively through a private flood insurer.
Image: Brickell Financial District, Miami – Tidal flooding on a sunny day during “King tides” on October 17, 2016. Image credit: Wikimedia Commons
The local regulator, the Florida Office of Insurance Regulation (FLOIR) has been vocal about the state having the largest proportion of NFIP policies in the country — 37 percent — with the state paying the most into the NFIP, and saying that it gets the least amount back in return. An article in Insurance Journal quotes former Florida Insurance Commissioner Kevin McCarty stating in 2016 that residents of Florida are paying “disproportionately higher rates” compared to the rest of the country. To get Florida homeowners a better deal, FLOIR has been proactive in stimulating the flood insurance market in the state.
To get more insurers involved with flood insurance, the regulator understood that they needed to help insurers better understand the risk. In May this year, RMS gained certification by the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) for the Version 17.0 RMS North Atlantic Hurricane Models to be used in residential rate filings with FLOIR. The certification is valid until November 1, 2019.
The modeling standards approved by the FCHLPM have set a bar for the quality of models being used to underwrite and manage flood risk. Any insurers doing business in the flood market will now have to use these models in order to approve their rates by FLOIR.
What is important is that these models will also offer an alternative to the FEMA view of flood prone areas, which may increase confidence in writing flood business. This could turn out to be a good combination of a public and private partnership, as the more business that is written in the private sphere, the less money that FEMA must spend. It gives the opportunity for private insurers to also diversify the flood risk, and they may be able to beat FEMA prices in some areas. It will also provide the ability to market in areas outside of the compulsory FEMA “A-Zones” to increase penetration.
Florida Leading the Pack
Florida has carved a reputation for insurance innovation. With the hurricane model certification, since the review process for new models is very involved and extremely detailed, most states, instead of setting up their own processes, rely on Florida to set the standards. Other states look to Florida acceptance as a requirement for using models in their own states, and it is not hard to imagine that other southeast states, for example, to accept the flood models approved in Florida for use in their own jurisdictions. This could create favorable regional conditions for flood insurance writers.
But there is a chance that, even with approved models, that the market conditions will not be favorable to write flood business. Much of the driving force behind the regulatory process is to protect the consumer from perceived “unfairly discriminatory” rates, and if the private market cannot compete with FEMA subsidized rates, carriers may not attract business. Even if things go well in Florida, there is not a guarantee that modeling best practice will be accepted in all other 49 states and territories. Each state will vary, some states may not have the same bandwidth or expertise to evaluate the models as is the case with Florida.
It is in everyone’s interest to drive up flood insurance penetration, whether it is using the NFIP or private insurance policies, but as Florida recognizes, the FEMA view of risk that the NFIP uses is too monolithic, and innovation will only come through a more granular view of risk. With an alternative view, insurers and consumers alike can get policies that more readily suits their needs.