An avid follower of all insurtech startups and a critical thinker, he has also contributed several papers in organization wide technical paper contests.
- Bank Reconciliation - November 29, 2022
- London Bridge Risk:A Protected Cell Company - January 2, 2022
- Side Pockets in (Re) Insurance investments - July 20, 2021
What is it and who needs it:
NFIP, an acronym for National Flood Insurance Program, is a program to provide flood insurance in US flood-prone areas and communities which started 40 years ago in 1979. This program is administered by a federal agency FEMA (Federal Emergency Management Agency), the federal agency for Emergency Management, and gets annual funding (~$18 billion) from the US Congress. The purpose of this program is to allow private and public buildings to be insured for flood damages with a Standard Flood Insurance Policy (SFIP) issued by FEMA. Flood damage is generally NOT covered in any homeowner policy or business risk policy for the reason that it has catastrophic potential. We’ve seen this in billions of flood-related damages caused in recent years by not just floods, but by the torrential rain that comes down with Hurricanes (e.g. Katrina in 2005), Tornadoes and Super Storms (e.g. Sandy in 2012). NFIP has got more than 5 million active policies as of 2018. At one point in 2009, this number had gone up to 5.7 million.
How does it work:
FEMA identifies the areas that need flood insurance with the help of several mechanisms, primary amongst them being Flood Hazard mapping which assesses the flood hazard and planning to cover the risk. Once the area has been identified and a risk map prepared, FEMA officials partner with state officials and each community stakeholder to provide accurate flood hazard and risk data to plan for flood risk mitigation. These risk maps contain data such as river flow, special flood hazard zones, base flood depth, storm tides, hydrologic analysis, rainfall, and topographical surveys as well as any other supporting technical data.
FEMA risk mapping classifies communities into
- Emergency flood risk communities
- Regular risk communities
There are incentives in pricing for communities to do better floodplain management and move their communities from Emergency flood risk community to Regular Risk. There is also a countywide flood insurance risk map that shows flooding information for the entire county’s geographic area.
What is changing in NFIP and why
NFIP has been reportedly facing losses (losses more than earned premium) in the past few years. Also, the active policies in NFIP have taken a hit. Industry analysts have opined that this may be because of the way FEMA prices the SFIP policies. The pricing model considers mainly the flood plain area and all the properties in that designated area of the community has to buy the flood insurance policy and pay the same premium regardless of the real active risks to the properties (e.g. a Zone A in Iowa pays the same premium for a Zone A in Florida). With the new risk model, each location will get assessed independently for the flood risks it faces. This will fetch accurate premiums and is expected to improve the loss ratio.
Some analysts have said that in today’s world of technological advancement, there is the possibility of assessing the risks within the individual location itself. For example, if there is a house to be insured in flood risk Zone A, but all the insured valuables are kept in a vaulted safe beside the side of the wall that has been reinforced better than other sides of the walls. There is a possibility that this risk is priced better than the others where such protection is not present for the insured property.
So the entire rating model will change and is expected to be “actuarially defensibleâ€, meaning the agency is not expected to ask for more funds from the Treasury and cover all losses and expenses with the policies written. In my view, the investment portfolio should also be evaluated to ensure that if there is any possibility to improve overall results with the investment income offsetting the underwriting losses, it should be aimed at. June 2019 is the date industry is waiting for to see how FEMA will address the comprehensive overhaul of the NFIP. So let’s wait and watch.
