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Surveys suggest that 91 percent of American homeowners purchase insurance, but when it comes to flood risk the story could not be more different. Flooding is not covered in standard homeowner or renter policies, and the take-up of flood-specific coverage for homeowners is estimated to be around 15 percent – even though flood is a prevalent, nationwide peril. In the last decade, 98 percent of U.S. counties have been affected by flooding. According to the National Flood Insurance Program (NFIP), about 90 percent of natural disasters in the U.S. involve flooding. So, why is insurance take-up so low, and how can the market support change?

There are many factors to consider: poor communication of risk, a general misunderstanding of the risk, and acknowledging the risk but considering protection too expensive and difficult to justify. Today, homeowners base risk decisions on whether their property is in or out of a FEMA Special Flood Hazard Area (SFHA) to ascertain whether it is flooded or not. Even when a property is within an SFHA zone (areas with a greater than one percent annual probability of flooding), only one-third of homeowners hold policies, despite mandatory coverage for the first year of a mortgage term. This low penetration illustrates that policies are rarely renewed when no longer required by law.

The SFHA “in-or-out” view is also misleading. According to RMS® analysis, the depth of flooding can vary significantly within FEMA flood zones. Examining properties in SFHAs in a single Houston postcode showed that flood depth can vary from no flooding to greater than 12 feet of flooding.

Outside of the SFHAs, homeowners may believe they are safe inland, away from rivers and associated flood risk from large storms like Hurricane Harvey (2017). This designation of the 100-year zone has likely contributed to a lower perceived value of flood insurance for those outside of this classification, providing even less reason to purchase. But this spatial variability of flooding exists in areas outside of SFHAs, traditionally thought to be low risk. Significant losses continue to occur: Hurricane Harvey saw upward of 75 percent of claims arise from properties classified as outside SFHAs, as did Hurricane Michael (2018).

Accommodating Mitigation in Flood Risk Assessment

Affordability is a thornier subject. The average flood insurance premium in 2018 was $642, which might appear expensive. However, with an average paid flood claim of $42,500, a single flood throughout the lifetime of a standard 30-year mortgage could justify flood insurance purchase.

A homeowner’s individual property characteristics may also mitigate or exacerbate the risk, enabling variation to legacy rating approaches and, in some instances, making insurance more affordable. A key component of a property’s risk of flooding is not only the frequency but also the severity of the floods. For example, when exposed to the same hazard, the presence of a basement or an elevated first-floor height can determine if a location experiences no loss or significant loss. An assessment of a single property suggests that the expected loss to a structure exposed to moderate flooding can vary by as much as 325 times, depending on a property’s characteristics.

To put this into context, a property exposed to the same level of moderate flooding could incur a loss of $100 or $32,500, dependent on information that is often already captured and can be considered in today’s solutions. Both examples highlight that the level of complexity goes beyond a simple “in-or-out” assessment.

Time for Change

The protection gap remains, and the risk of flooding is widespread, which continues to be poorly communicated and misunderstood. However, things are changing. A plethora of solutions from private companies are becoming available to better assess flood risk, though few provide a means to translate the rich building data collected today into a location-level rate.

We should acknowledge that FEMA is introducing Risk Rating 2.0, which is due to go into effect nationwide in October 2021. This initiative will go some way to addressing this problem by introducing fairer and simpler rates, and it will provide a long-anticipated update to a methodology that remains largely unchanged since the 1970s. A private flood market is also emerging, albeit slower than might have been predicted a few years ago.

There is a long road ahead before the availability of flood insurance is commonplace in homeowner and renter policies, but there are signs of progress. The NFIP, which currently provides the lion’s share of minimal coverage, earns about $3.5 billion in written premium per annum. With the risk comes a significant opportunity – estimated by some as up to $40 billion – and that risk is becoming increasingly better understood.

Access to RMS models and data provide solutions that can help insurers feel comfortable in making coverage more accessible. Simultaneously, repeat events are helping homeowners and renters understand the need for coverage. If both the market and the homeowner are better informed, there is hope that this protection gap can be progressively narrowed.

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June 27, 2019
An Award-Winning U.S. Inland Flood Model

It was off to London’s Savoy Hotel for members of the RMS London team last Thursday, for the Eleventh Trading Risk Awards. And apart from the great hospitality, and the flowing conversation from colleagues and industry peers alike, RMS was also recognized by the award judges, receiving the “Initiative of the Year” award for the RMS U.S. Inland Flood HD model. Without sounding like an Oscar acceptance speech, on behalf of the team that worked on the model, I would like to thank the judging panel made up of representatives from the media and the industry for selecting our entry. Released last October, the flood model is designed to help the private insurance market seize the opportunities presented by this peril, and to also ultimately help accelerate flood insurance take up in the U.S. Ben Brookes, managing director – capital and resilience solutions, RMS, (pictured center) receives the “Initiative of the Year” award at the Trading Risk Awards 2019 In a country where hurricanes, tornados and wildfires can dominate the headlines, it is flood that is the most frequent and widespread peril in the U.S. Events range from small, localized flooding to widespread inundation impacting multiple river catchments and basins. The state-backed National Insurance Flood Program (NFIP) – recently extended until the end of September by Congress, dominates the flood insurance market, providing 95 percent of residential flood policies. Even after significant flood events, such as from Hurricane Harvey in 2017, and Florence in 2018, NFIP policy numbers have recently plateaued; the New York Times reports that policies in force are below those a decade ago. In Midwest states, NFIP policies are down by a third since 2011, which has left many uninsured against this year’s ongoing flooding across the region. Flood is underinsured throughout much of the country, where only a third of homes in floodplains have insurance. And of the tens of trillions of dollars exposed to flood, still only a fraction is covered by the private market. With FEMA looking to boost the number of households with flood insurance in the U.S from around five million now to eight million in 2022, what can be done to start to increase flood insurance penetration and to close this growing protection gap? How can private insurers enter the market with confidence and build a flood insurance business which will be profitable and sustainable in the long-term? It is our belief that the insurance industry is currently inadequately served in terms of the accuracy and breadth of data available to achieve this task. As well as accessing accurate flood hazard data, this also extends to data on flood defenses, the first-floor height of a building or the presence of a basement – all key factors in assessing flood risk. There is also a need to use tools that can discern the high-gradient nature of flood extent and severity – and to accurately quantify probabilistic loss to exposures at risk. We believe that the RMS U.S. Inland Flood HD Model does offer a comprehensive and well-validated view of flood risk throughout the contiguous U.S., which can help (re)insurers gain the necessary insights into the range of potential commercial opportunities associated with the private flood market. It captures the risk associated with all aspects of precipitation-induced flooding, including those resulting from tropical cyclone and non-tropical cyclone rainfall, while also accounting for factors that impact rainfall runoff (e.g., groundwater response, surface evapotranspiration, and snowmelt). To capture flooding caused by tropical cyclones, the model is explicitly coupled to the same event set as the market-leading RMS North Atlantic Hurricane Model. Understanding flood risk and how it is correlated with wind exposure, is required for management of an overall book, risk tolerance and accumulations. And thus, it is particularly important to use a consistent view of risk across those aspects and across perils. By linking these models, it has enhanced the development of a truly complete and consistent view of the U.S. flood risk landscape – providing knowledge of how flood is spatially and temporally correlated across all its major sources, including storm surge and the wind peril. Probabilistic modeling is essential, and the proprietary modeling methodology simulates over one million individual events, collectively representing 50,000 years of continuous precipitation, runoff, river discharge, and inundation within and across affected regions. These robust simulations provide a complete characterization of low- and high-severity flood events that could damage property, minimizing uncertainty to inform confident capital allocation, solvency assessments, and pricing based on model output. The model includes simulations of physically plausible flood events capable of causing losses far greater than have been observed historically, allowing (re)insurers to prepare for the potential financial impacts of the next flood catastrophe. Using Innovative Modeling to Fill Critical Data Gaps Flood hazard, vulnerability, and loss are extremely sensitive to building elevation and the presence of basements, which vary geographically across the U.S. When this data is not captured by the user, the model leverages proprietary inventory databases developed from extensive research to infer each building’s first floor height and basement likelihood. The explicit modeling of these two flood-specific characteristics, in addition to other general characteristics (e.g., construction class, occupancy, year built, etc.), helps reduce uncertainty in technical pricing with high-precision, per-location risk assessment. Effective flood defenses also make a crucial difference when assessing flood risk. A major task of the RMS flood modeling team was to take disparate public levee data, which only accounts for a maximum of 20 percent of the nation’s flood defenses, together with the use of a proprietary stochastic modeling technique that accounts for the likely presence and standard of protection of defenses along the entire modeled river network. This gives the option to see defended and undefended views of risk – to establish how the risk is reduced by a flood defense, and also allows users to customize these views, by adding their own defense information or adjusting the model’s default view. Allowing the market to quantify the sensitivities and impacts of various flood mitigation efforts and failure scenarios helps facilitate appropriate flood risk selection, pricing, and portfolio growth decisions throughout the U.S. Gaining confidence and understanding around U.S. flood risk is a sound first step for the insurance industry to move forward and offer innovative coverages to meet the diverse needs of the market. And as the judging panel recognized, the U.S. Inland Flood Model represents real innovation to help achieve this.

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Oliver Smith
Oliver Smith
Senior Product Manager, Data Product Management

Based in London, Oliver is a Product Manager within the data product management team, responsible for overseeing the development and release of RMS data offerings across multiple peril regions and delivery vehicles. Oliver joined RMS in 2013 and has held roles in the Global Knowledge Center and Model Product Strategy teams prior to joining Product Management in 2016. Oliver is a Certified Catastrophe Risk Analyst and holds a bachelor's degree in Economics and Finance from Keele University.

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