“Every building is in a flood zone”: key takeaways from the US National Flood Conference

Last week, as is the case with many conferences in the current COVID-19 situation, the National Flood Conference moved online in a series of webinars. Hosted by the American Property Casualty Insurance Association, the conference brings together players from across the US insurance and reinsurance market to discuss the foremost topics in the industry, from the current state of the private flood insurance market to future risks under a changing climate.

Here, we explore our four key takeaways from this year’s event.

Everywhere has a flood risk

Since 1996, 99% of counties across the US have experienced flooding (FEMA, 2020). This exemplifies the first major take-home from the conference: every building has a flood risk.

However, despite this, flood insurance take-up remains low, especially outside of FEMA-designated high-risk areas.

It’s widely accepted in the market that around 15% of single-family homes in the US have a flood insurance policy. However, we heard from US insurer Milliman that its studies suggest this is an over-estimation. In fact, Milliman estimates it at only 5-6% of US households.

Although insurance take-up varies from one county to the next, it’s reasonable to assume, based on Milliman’s estimate, that only a small proportion of homes affected by flood on an annual basis can actually claim on insurance.

Furthermore, many claims from the small proportion of homeowners who do have insurance through the National Flood Insurance Program (NFIP) fall outside of FEMA’s designated high-risk areas. 

JBA’s analysis of the open claims data published last year by FEMA shows that a high number of claims were made for homes that sit outside of FEMA’s 100-year flood zone, which is used to delineate Special Flood Hazard Areas (SFHAs) (Figure 1). As a result, homeowners can’t assume they are safe from flood just because they are not located in a high-risk area.

Figure 1: JBA analysis of FEMA open claims data. The map shows the proportion of claims data that fall outside of FEMA's designated high-risk 100-year flood zones.

The high proportion of claims from non-SFHAs can be explained by two key factors:

1. The SFHAs are defined using only fluvial (river) and storm surge (coastal) flood maps. They don’t consider pluvial (surface water) flood hazard.
2. The SFHAs are defined using a binary ‘in or out’ approach to risk assessment, based only on FEMA’s 100-year flood map.

We’ve discussed some of the shortfalls of the FEMA flood maps in a past blog and these statistics further emphasise the importance of using flood data that provides a comprehensive understanding of flood risk. As the session dedicated to urban flooding on the first day demonstrated, pluvial flooding is responsible for many of the non-SFHA flood claims made in recent years.

We also heard from the Association of State Floodplain Managers Foundation who recommend in their February 2020 Urban Flooding report that the 100-year flood zone is “too low” when assessing flood risk in urban areas. By this, they mean that flood data should include shorter return periods or, expressed another way, higher annual probabilities of flooding.

JBA’s US Flood Map provides water depths for return periods ranging from 20-year (5% annual chance of occurrence) to 1,500-year (0.07% annual chance of occurrence), so directly addresses the need for data to include a range of different probabilities, and also indicate risk from fluvial, pluvial and storm surge flooding.

Future flood risk under climate change

A second key takeaway highlights the need to consider future risk, now. The National Flood Conference saw some interesting discussion around climate change and its potential impacts on the insurance, mortgage lending and real estate industries. It’s expected that many parts of the US will see increased frequency and severity of flood events over the next 30 years.

The financial impact of this, explored by Milliman, is expected to create an increase in the number of mortgages going into default, as well as the number of homes that are sold on after a flood event without undergoing repair. These two factors contribute to falling property prices, and even a model based on a conservative view of sea level rise suggests that credit losses could increase by four to five times the present-day level. 

However, in an unexpected turn of events, and contrary to those model predictions, we heard from the National Association of Realtors that house prices in Florida have actually increased over the past five years.

Despite the observations from Florida, mortgage lenders were given an emphatic warning that they should be proactive in preparing for regulatory climate change stress tests. Such tests were already being planned for 2020 but, due to the COVID-19 pandemic, plans have been put on hold. The stress tests will be back though, under proposed legislation. Lenders need to start using maps and models now to understand and quantify the financial impacts of climate change on their business. This is something that has been in place in the UK for some years and JBA has helped many firms meet regulatory needs in climate change stress testing.

COVID-19

Unsurprisingly, the global pandemic was referenced throughout the conference. It’s on everyone’s minds and has affected people around the world in many different ways. There was a conference session dedicated to discussing the impact of COVID-19 on flood insurance. It’s an unavoidable fact that, as many people have been on reduced income or even lost their jobs during the pandemic, they’ve had to make tough decisions about what they spend their money on.

As a result, insurers are reporting numerous cases where homeowners are looking to cancel their flood insurance policies, citing the fact that they’re not in high risk zones according to the FEMA maps. As we’ve already explored, this binary view of flood risk can give a false sense of security and the need for a fully informed decision based on comprehensive risk data has never been more evident.

Insurers have been working with homeowners to help reduce premiums and explore other options, whether it’s property-level flood protection measures or insuring contents as opposed to the entire property. Protecting homes against flood risk remains vital, especially as the US approaches hurricane season.

Although COVID-19 is an unprecedented situation, it highlights a key fact: lots of external factors can compound flood risk.

Partner with experts

Speaker after speaker spoke of the protection gap and of the need to close it. At the same time, we heard estimates for the size of the residential flood insurance market ranging from some $35B to over $45B. All of which begs the question, why is there not more private flood insurance being written? 

Admittedly this is a question that requires a multi-faceted answer but one point that was raised on several occasions was the need to partner with those that truly understand flood and the nature of the risk it represents.

Flood risk is not binary. Instead, it’s a complex peril that ranges over small areas and short timescales – one house may be flooded, while the house next door may be spared. Flood is also not uncommon – as we’ve seen earlier, a huge number of households are affected by flood, and therefore a deeper understanding on the part of insurers is required to write business effectively. This is where experts like JBA come in.

We’ve been working in flood risk for over a decade now and are known to our clients as The Flood People. With our first-of-its-kind global flood data, including the highest resolution national-scale US Flood Map on the market and unique US Pricing Data, we can help insurers better understand the peril and provide the tools to write and price the risk effectively.

Want to learn more about our flood data in the US? Get in touch today to speak to our team.

References

FEMA. 2020. Data Visualization: Historical Flood Risk and Costs. [online] Available at: https://www.fema.gov/data-visualization-floods-data-visualization [10/06/2020]