< PreviousPrivate Flood Insurance Supplement 10 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. infrastructure changes are causing that storm water to run off in places that maybe we didn’t expect. Craig Poulton: I would also add to that that there continues to be billions of dollars built where they shouldn’t be located. We’re placing a lot of structures in the way of flooding. I would posit we are aware of it, but we’re ignoring it. John Weber: With these changes, John, how is flood changing in as far as underwriting goes? John Dickson: Christa hit right on it. The weather is changing, and so as the weather changes, the way that we approach this risk has to change. We’re seeing storms that last further inland, hold their energy longer, travel thousands of miles to inundate metropolitan areas. We had to constantly think about new ways to assess risk and manage risk. If we can think about risk through yesterday’s lens, then we’re going to continue to be caught unawares and our communities are going to be devastated. We have to think about new technologies, new ways about distribution, communication, education, awareness. There’s a massive insurance gap in the United States when it comes to flood insurance. All of us here at this conference, listening to this panel, we have to think about new ways to understand risk, to price risk, to reach homes in different ways to better protect our communities. Craig: John is right on the money. We are seeing, I believe that Christa and John would both agree with this, we’re seeing a great deal more interest in doing exactly what John has outlined on the part of major insurers and reinsurers. Christa: Historically, there’s been this stigma, I suppose, around flood in saying, “I only need flood if I’m in a high-hazard zone. I only need flood if my mortgage company requires it.” Because there have been these limits set by the NFIP, people think, “If I’m buying the maximum available, then I have enough.” We’ve seen inflation, we’ve seen increased costs of construction, and yet those limits have stayed the same. Like John said, we need to raise more awareness in saying maybe the only option is not just buying the maximum available at the NFIP. Maybe we need more coverage, and we need to be able to diversify outside of people only buying flood coverage in the high-hazard zones to allow those insurers that are providing the coverage to offset some of their riskier flood accounts with some that are a little bit less risky. John Weber: John, you mentioned distribution. Is that changing? Christa Nadler Area Executive Vice President, RPSPrivate Flood Insurance Supplement 11 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. John Dickson: I think it is. As people engage with insurance in new ways, technology, buying commodities, products on your smart devices, on mobile devices, engaging with industry through different media, that does change the way distribution has to reach our customer. It also changes the way that we can communicate risk. We talk constantly about change, but there are some constants, and Christa touched on a couple. One constant, water doesn’t know to stop at these imaginary boundaries that we draw on maps. Another constant, floods continue to happen. If we’re mindful of these constants while we’re keeping our eyes on the changes, particularly changes with how we communicate in purchasing tendencies and how consumers want to absorb and consume products, we can make some headway. A lot of work remains, however. Craig: When we talk about distribution, we can’t not intone flood maps, as John just referenced. The distribution system overlays the flood map, which the NFIP has made a horizontal construct. Flood maps are a vertical construct. The US flood map should be a series of pin dots on low-lying structures that are near enough water to be flooded or near enough to the sky to receive [laughs] enough rain to be flooded. It would be a large number of pins. To draw a horizontal map to try and describe a vertical construct is doomed to failure. Craig Poulton CEO, Poulton AssociatesPrivate Flood Insurance Supplement 12 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. 50 percent, at least, of the structures that should be mapped in and be forced to buy flood insurance, if they have a mortgage through a federally insured institution, should be included in this distribution mechanism, but they’re not. They aren’t there. It’s been proven time and time again. The NFIP spent $15 million on advertising, I believe it was in 2016 or so, and didn’t move the needle at all. You can’t just tell people, “You need flood insurance,” and they’ll buy it. That’s not how it works. They have to pretty much be forced into it in order to buy it in large numbers. As John intoned, though, there will be, for example, homeowners’ endorsements for folks that are not in significant danger of flooding will help a lot. Somebody somewhere has got to look at this flood map issue, which we’ve known about for years, and change it. We’re not going to make much progress unless we do that. John Weber: Craig, can you talk to us a little bit about Risk Rating 2.0, what that is, and what’s going on with it? Craig: Sure, I’d be happy to. Risk Rating 2.0 is FEMA’s new rating methodology as opposed to, I’ll call it 1.0. It’s extremely well-thought-out, and they’ve had some great experts on their team to put it together. However, interestingly, the vast majority of NFIP Special Flood Hazard Area risks continue to have their risk rating 1.0 rate at renewal. While Risk Rating 2.0 was absolutely a necessary to have the NFIP be able to fairly distribute a rate increase, which Congress told them they must do in 2012, they proceeded after 2012 to drop their rate instead of increase it, even though Congress mandated that they increase it. One of the reasons was they had no way to fairly distribute the rate. It was a randomly assigned rate prior to Risk Rating 2.0. Risk Rating 2.0 came in to the mix. Because of the way it’s implemented, and I won’t go into the technical aspects, but because of the way it’s been implemented, a large number of what are called X-zone risk folks have exited the purchase of flood insurance through the NFIP. A lot of them have gone to the private market, but very few, about half of folks can’t get access to the private market through their current agent because they write with the WYOs only. Having this exodus of risks, they have not gone to the private market. Risk Rating 2.0, very necessary, well-done, well- thought-out, not being implemented in its entirety, and not scheduled to get the full impact of the correct rate or the actuarial rate for 10 years. We’ve got some challenges. I could go into all of the things I think NFIP could do, but I’ve talked long enough. [laughs] I’ll let somebody else. John Dickson President, Aon EdgePrivate Flood Insurance Supplement 13 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. John Dickson: I love the last point that you made about the time it’s going to take to get to that full risk rate. That’s one of the biggest challenges with Risk Rating 2.0. The way that it’s structured in Congress, the increases are capped, but the decreases are realized 100 percent. That means that if someone is going to see 15 percent off of their rate, they see that today. If somebody is going to see a 20 percent increase, they only see a part of that today, and that inches in over time. We don’t have time. We’re running at a deficit. We have, again, a massive exposure in this country that needs to be closed. We don’t have 10 years to fix this. That’s one of the biggest flaws with Risk Rating 2.0. I love the way you say it. It’s a great concept. The execution could use a little work. John Weber: What’s going on with the NFIP? John Dickson: The NFIP has an incredible mandate. You think about this is a government entity that’s been charged to provide flood insurance to every home in the United States. It’s an incredible undertaking. I also love where Craig started the conversation today. If we continue to build structures where structured don’t belong, the problems that we’re talking about today will persist. The NFIP, in the execution of that mandate, has some ways fostered that behavior. They’ve encouraged that behavior, because you continue to get insurance, you continue to rebuild, and we see it time and again. The NFIP insurance structure that’s now being rebuilt for its fourth or fifth time. They buy insurance for a couple thousand dollars from the government, and then they get a new house every couple of years. That has to stop. The NFIP needs to work through these challenges with homes not belonging where they are and repetitive loss structures. That would greatly improve the industry and our country. Craig: On repetitive loss structures. I can’t resist mentioning that the NFIP has taken every structure and taken it to the actuarial rate or below the old...Most of them have the old 1.0 rate. They don’t take into account losses at all for repetitive loss structure. It’s do-over time for repetitive loss structures. When they have their first loss, then all of their prior losses come back to haunt the structure. Unfortunately, and I believe this is happening from anecdotal evidence, people who have repetitive loss properties are selling to people who don’t know it’s a repetitive loss property because the NFIP doesn’t release the data. In order to have a flood later on for the unsuspecting buyer, which will then find out it is repetitive loss property, and their premium will skyrocket, and they’re the one left holding the financial bag, which should have been rightly borne by the prior owner who knew what they were selling. It’s almost like the government’s complicit in a tricking device scheme. It’s a sad thing for the folks who are going to buy those homes thinking they’ve got a beautiful home near the water, and then they find out that the premium is so high that they can’t sell it for anything close to what they bought it for. John Weber: Where’s the flood market headed? Anyone’s guess. Christa, would you like to venture a thought?Private Flood Insurance Supplement 14 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. Christa: A year or two ago, we would have said, “All right, we think that we’re going to get more and more traction in the private flood market.” I think we have. It certainly makes sense to try to get more risks maybe out of the federal program and into the private market. The delta in pricing and deductibles in the way that the business is underwritten remains so large that it’s going to take a long time. John touched on it, as did Craig. If you’re getting that rate increase over the course of 10 years, there’s never time for the private market to catch up. The NFIP program, it serves a wonderful purpose, but it is still very underpriced compared to where the private market is. It’s hard to have that crystal ball to say where it’s going to be. I do think we’ll start to see more people trend towards the private market. There are advantages to being in the private market, but the NFIP is obviously here to stay as well. Craig: I’ll make one observation that’s germane to this, and that is that because the legacy rating system, 1.0, used the same rate in each flood zone, but the flood zone is not flat, it undulates. If I’m three feet above John, I deserve a lower rate than John, but I get the same rate. Hence, that reality creates a random assignment of rate. 50 percent of the people in the old 1.0 assignment mechanism were getting a rate that was too high. That’s what we’ve been trafficking on for several years. The private market is not always priced higher than the NFIP. Oftentimes, it can be lower, and reasonably so. With 2.0, hopefully that correlation becomes less and less pronounced. It’s still there. We still have 50 percent of the people in NFIP, they’re paying, as John implied or outlined, the folks that should have gotten a lower rate, a lot of them have gotten a lower rate. 23 percent, I believe it was. There’s still a lot that are getting the old randomly assigned rate. 10 Most Significant Flood Events by National Flood Insurance Program Payouts* RankDateEvent Number of Paid Losses Amount Paid ($ millions) Average Paid Loss 1Aug. 2005Hurricane KatrinaAL, FL, GA, LA, MS, TN168,25616,09295,640 2Sep. 2017Hurricane HarveyAL, AR, FL, GA, KY, LA, MS, NC, TX78,2549,171117,192 3Oct. 2012Superstorm SandyCT, DC, DE, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, VA, VT, WV 132,8978,61964,852 4Sep. 2008Hurricane IkeAR, IL, IN, KY, LA, MO, OH, PA, TX47,2472,67056,517 5Aug. 2016Severe storms and flooding LA27,7372,53691,432 6Sep. 2004Hurricane IvanAL, DE, FL, GA, LA, MD, MS, NJ, NY, NC, OH, PA, TN, VA, WV 31,9811,68852,791 7Sep. 2021Hurricane IdaLA, MS, TN, KY, VA, OH, WV, PA, NJ28,5441,58955,658 8Sep. 2004Hurricane JeanneFL, DE, MD31,4861,51348,062 9Aug. 2011Hurricane IreneCT, DC, DE, MA, MD, ME, NC, NH, NJ, NY, PA, RI, VA, VT 44,1781,32129,894 10Sep. 2017Hurricane IrmaFL, GA, SC23,1191,15349,884 Exhibit 1 * Includes events from 1978 to December 31, 2021, as of March 31, 2022, defined by the National Flood Insurance Program as an event that results in at least 1,500 paid losses. (Stated in dollars when occurred.) Sources: US Department of Homeland Security, Federal Emergency Management Agency; US Department of Commerce, National Oceanic and Atmospheric Administration, National Hurricane Center, via Insurance Information Institute and Statista.Private Flood Insurance Supplement 15 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. Christa: Essentially, what that does is the private market is coming in and they’re being opportunistic. They’re going to pick off those ones that are getting that much higher rate, despite maybe being built up a little bit higher, or whatever it may be. Then, it’s a self- fulfilling prophecy that again, now, we leave the NFIP with only the absolute worst risks. Craig: Hopefully. Christa: Is that what we want? Is that not what we want? I don’t know. It certainly will make a difference in the future if the NFIP is only doing those risks that are truly the ones that have the most flood exposure. Craig: Till every insurance crisis gets fixed, insurer of last resort. Either that or assigned risk pool. If we can go down that road, and the NFIP will except a position of insurer of last resort, we’re on our way to a solution. John Dickson: When I think about the future of the flood insurance industry, one thing that strikes me that the private industry is showing, that flood insurance can work. It is working, and maybe not with the velocity that we’d like, but we talk about lower pricing or higher pricing, everything that we’re talking about with the NFIP is doing a Risk Rating 2.0, the investments that are happening in industry, better mapping resolution, better models, that doesn’t make us price lower or higher. It makes all of us price better. That’s what’s happening today. It’s going to take some time, it’s going to take education, it’s going to awareness, it’s going to take AM Best TV to get the message out. We are pricing flood insurance better today than we did yesterday, and we’ll continue to do that. Swiss Re: Global Insured Flood Losses Double to $80 Billion Over 10 Years ZURICH - Global insured flood losses doubled during the decade ending in 2020 to $80 billion, compared with the prior 10-year period as populations, wealth and urbanization grew, according to Swiss Re Institute. Insured losses have risen steeply despite low penetration rates. Swiss Re said in a report 82% of global flood economic losses were uninsured from 2011 through 2021. Better data and risk mapping and modeling have improved the quantification of flood risk, said Swiss Re, and direct flood premiums have grown 20.5% annually since 2016 in the United States alone, compared with 1.8% growth through the National Flood Insurance Program. The private insurance market offers expansive opportunity in a market estimated at $37 billion to $47 billion, Swiss Re said in citing Milliman research. Climate change is ratcheting up the likelihood of high-intensity, heavy rain and short-duration flood events linked to tropical cyclones, it added in a new Economic Insights report. This year severe rainfall and floods have impacted homes and businesses Private Flood Insurance Supplement 16 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. outside typical floodplains globally, including areas of Australia, Europe, the United States, South Korea and South Africa. “In a rapidly changing risk environment, there is a need for insurers to raise risk awareness among consumers and distribution partners, including agents and real estate brokers,” said Swiss Re. Last year Hurricane Ida led the list of global natural catastrophes losses estimated at $105 billion and July floods in Germany, Belgium and nearby countries were the costliest natural disaster for the region in decades, Swiss Re said earlier. That was up from $90 billion in 2020 (BestWire, Dec. 14, 2021). Underwriting entities of Swiss Re Ltd. have current Best’s Financial Strength Ratings of A+ (Superior) and A (Excellent). By Renée Kiriluk-Hill, associate editor, BestWire Republican Senators Offer One-Year NFIP Extension Bill WASHINGTON — A group of Republican senators has released a proposal to extend the National Flood Insurance Program by one year. Bill Cassidy, John Kennedy, Marco Rubio and Cindy Hyde-Smith introduced legislation to reauthorize NFIP, which now is authorized through Sept. 30. Florida is home to 1.7 million NFIP policies, more than any other state, Rubio said in a statement. Photo by BRUNO FAHY / Belga / AFPPrivate Flood Insurance Supplement 17 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. “The National Flood Insurance Program is a lifeline for many Floridians,” he said. “We need to pass this legislation quickly so that no one experiences a lapse in coverage.” Democratic Sen. Robert Menendez has already introduced a bill to extend the program an additional five years. He said his National Flood Insurance Program Reauthorization and Reform bill would put the program back on solid fiscal ground, and reframes the nation’s entire disaster paradigm to one that focuses more on prevention and mitigation in order to spare the high cost of rebuilding after flood disasters. One thing the Democrat and Republicans have in common: They oppose Risk Rating 2.0. Cassidy, of Louisiana, called the program “disastrous.” Earlier this year, Cassidy released a statement on the Federal Emergency Management Agency acknowledging an internal study finding that the implementation of Risk Rating 2.0 to the NFIP could cause 20% of policyholders to drop out of the program due to higher premiums. Menendez said he hears from FEMA and special interest groups “who are completely out of touch with disaster victims, that premiums need to be raised sky high on policyholders to bring down costs. But these calls to raise premiums foolishly ignore the fact that FEMA’s huge administrative costs should be reformed to provide premium savings.” The Biden administration earlier this year gave Congress 17 proposals to reform the NFIP, including measures to end NFIP coverage to properties that repeatedly flood, prohibit Private Flood Insurance Supplement 18 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. new construction in flood-prone areas and require sellers and renters to make full disclosure of a property’s flood history (BestWire, June 20, 2022). The main property/casualty insurance trade groups, the American Property Casualty Insurance Association and the National Association of Mutual Insurance Companies support long-term extensions of the program. In a position statement, NAMIC said it favors the shift toward risk-based rates, policies designed to increase private sector involvement in the program and provisions to address affordability, increase mitigation and address repetitive loss properties. By Timothy Darragh, associate editor, BestWeek Flood Event Becomes Australia’s Third-Largest Catastrophe Ever as Loss Estimate Rises to $3.33 Billion SYDNEY - Severe flooding that hit Southeast Queensland and New South Wales in late February and early March is now Australia’s third-costliest natural catastrophe ever, as estimated insurance losses rose to A$4.8 billion ($3.33 billion), up A$500 million within the last month, said the Insurance Council of Australia. Nearly 225,000 insurance claims related to the event have been filed across both states, up 3.6% over the past month, the ICA said in a statement. Insured costs for the event rose 12% over the past month, driven in part by increasing materials and labor costs, the ICA said. Nearly 30% of claims have been closed and A$1.5 billion has so far been paid to policyholders, the ICA said. The previous loss estimate for the record-breaking floods was A$4.3 billion as the event became the country’s fourth-costliest disaster, said the ICA at the time (BestWire, June 1, 2022). Claims for the event rose to 216,465 across both states, the ICA said in a statement at the time. “The sheer scale of the extreme weather event that devastated Queensland and New South Wales is something we have never seen before, and the cost continues to rise,” said ICA Chief Executive Officer Andrew Hall in the recent statement. “Money is flowing into these devastated communities with A$1.5 billion already paid and this number increasing every day.” Cyclone Tracy in 1974 and a 1999 Sydney hailstorm caused more insured losses, the ICA said in its earlier release. This year’s east coast flood is the costliest flood in Australian history, it said. Nearly 125,000 home claims resulted from the flood event, requiring local councils to prepare for an influx of development applications for the large number of property rebuilding and repairs required, the ICA said. It has been four months since the ICA declared the event an insurance catastrophe, it said. According to the ICA, the four-month mark is significant as under Australia’s General Insurance Code of Practice insurers are required to make a decision on a claim four months after it is lodged.Private Flood Insurance Supplement 19 COPYRIGHT © 2022 A.M. BEST COMPANY, INC. AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. The event lasted several days and many claims were not made until days, weeks or months after the initial event, and locations such as Lismore were hit for a second time at the end of March, generating new or additional claims, the ICA said. Perils AG earlier increased it loss estimated for a Feb. 20-March 11 series of floods to A$4.90 billion from A$3.99 billion (BestWire, June 9, 2022). By David Pilla, news editor, BestWeek Ex-Federal Flood Insurance Administrator Says NFIP Reforms Needed to Fight Inflation and Debt WASHINGTON - Now that it has implemented Risk Rating 2.0, Congress must enact further reforms of the National Flood Insurance Program to fight inflation and address the program’s debt, the former executive director of the program told Congress at a recent hearing. Roy Wright, speaking to the House Financial Services Subcommittee on Housing, Community Development and Insurance, said reforms haven’t come easily, but they must continue. Inflation, in particular, will make rebuilding from a devastating flood more costly – a problem the federal government as a whole is addressing, he said. Lawmakers, however, have a responsibility to fix coverage limits that have not changed since 1994, he said. Congress fixed that limit to $250,000, he said. “Here is the impact of Congress’s inaction: When hurricanes make landfall in the United States this year, Americans who did the right thing and bought flood insurance will learn the consequences of being underinsured,” Wright said. “When the cost of rebuilding their home comes in at $370,000 and they only have $250,000 available in coverage, they will be underwater – for the second time.” Wright, who now is president and chief executive officer of the Insurance Institute for Business & Home Safety, said lawmakers should peg NFIP coverage limits to the Federal Housing Finance Agency’s conforming load limits. That would allow homeowners to purchase coverage that is appropriate for their home, he said. Inflation also will hit the program administration side of NFIP, he said. “The debt held in the flood insurance program is about to get walloped by rising interest rates,” Wright said. “While I know that there is no bipartisan legislative path today to resolve the outstanding debt, I must warn you – this will come back to haunt you, FEMA, and all those who depend on the NFIP Roy Wright President & CEO, Insurance Institute for Business & Home SafetyNext >