Private policies mean more options and possibly better coverage

Floods are a growing concern for homeowners in many geographic regions. Last year alone saw over 50 severe flood events worldwide, with more expected due to climate change. And floods are causing more significant damage because of population and economic growth in areas vulnerable to natural disasters.

But there is a positive development when it comes to staying protected: consumers now have more choices for flood insurance policies than before. Getting coverage from the U.S. government isn’t the only feasible option, as there is a growing number of private providers.

Why you need flood insurance (a brief reminder)

It’s worth a quick recap of why flood insurance is worth the investment.

  • Your community will likely experience a flood at some point. The Federal Emergency Management Agency (FEMA) reports that 99 percent of U.S. counties did between 1996 and 2019.
  • Over a quarter of homeowners who filed a claim for flood damages didn’t even live in a designated flood zone.
  • Flood waters (and the costs associated with them) continue to rise.
  • Flood insurance not only covers the catastrophic events that play out on the news, but the heavy rains, storm surges, and blocked drainage systems that can accompany more routine weather events.

Traditionally, most homeowners only obtained flood insurance through the National Flood Insurance Program (NFIP), whose fairly rigid policy terms and rates are set by the U.S. government. But that is changing—there is now a growing market of private flood insurance options that can provide policies customized to a property’s specific flood risk.

The limitations of NFIP coverage

While NFIP remains the most common form of flood insurance, it has some limitations and considerations, including:

It can be subject to politics.

The government’s ability to provide flood insurance relies on Congressional approval, which was most recently passed and signed by President Joe Biden on March 11, 2022. This extends the NFIP authorization until September 30, 2022. 

But in the rare instances when political turmoil has allowed this authorization to lapse, it creates the possibility that FEMA will be unable to pay claims until funding is restored. In contrast, private flood insurance providers operate independently of changes in the political climate.

There are limits to what it covers.

The NFIP provides two kinds of coverage:

  • Replacement cost. This covers damaged parts and compensates for their replacement with new parts.
  • Actual cash value (ACV). This covers only the depreciated value of the damage. For example, old furnishings are reimbursed for their present-day value, not the cost of buying them new. This can leave a homeowner on the hook for the difference.

In addition, NFIP doesn’t cover “loss of use” or “additional living expenses” if you need to live somewhere else while your home is repaired.

You may have to wait for coverage.

Most NFIP policies have a 30-day waiting period before coverage begins, whereas private insurance policies may not.

Risk Rating 2.0 opens the door for more private providers

Last year, FEMA, which manages the NFIP, released Risk Rating 2.0. This new system uses top-of-the-line technology and industry best practices to create clearer and more equitable flood risk estimates and insurance rates. Previously, FEMA determined coverage using flood zones, a relatively static measurement that resulted in less reliable and accurate risk assessments and pricing.

Starting on October 1, 2021, this new structure calculates rates using the following criteria:

  • The cost to replace the home.
  • The unique features of each property, which may include the type of foundation and height of the lowest point in the home as they relate to the base flood elevation.
  • Variables in geography, which can include the types of nearby water bodies, how close the home is to that water, and the elevation of the residence.

What benefits does Risk Rating 2.0 provide to homeowners?

  • Rates that reflect more flood risks
  • A more accurate snapshot of a property’s risk level 
  • A simplified process for generating flood insurance quotes
  • The use of the latest actuarial methods to set rates

Under Risk Rating 2.0, homeowners are expected to see more accurately priced policies, and, unfortunately, 77% saw increases after the program’s initial rollout. 

The positive side of these more accurate risk assessments, however, is that they’ve made it viable for more private providers to offer coverage. Previously, the risks were too variable, hard to predict, and expensive for insurance companies to provide policies confidently. Risk Rating 2.0 has helped change the business case.

Private insurers are slowly expanding

Insurance companies are carefully wading into the flood insurance market, with many staying away from riskier, flood-prone regions and others focusing on commercial properties rather than homeowners. 

A gradual migration of some policyholders to private companies also coincides with the NFIP reporting $20.5 billion in debt last year, with losses going as far back as 2005’s Hurricane Katrina. Hopefully, well-priced private policies will alleviate some pressure on the government program.

Should you consider private flood insurance?

Although there are some potential drawbacks, private flood insurance could offer some significant benefits:

  • Lower prices (eventually). More private carriers mean more competition, which could help minimize flooding’s economic risk and lower prices overall. A private policy may cost less than one offered by the NFIP.
  • Greater coverage. NFIP currently caps coverage for residential buildings at $250,000 and non-residential buildings at $500,000. Private insurers can offer more, particularly if your building is in a low-flood risk area, and they may require higher minimums. 
  • More flexible (and comprehensive) coverage. Private firms often cover a wider range of possessions than their government counterparts. Items such as jewelry, fine art, furs, and other collectibles often get overlooked under NFIP policies, which toss things like these into the same category and cap the damages at $2,500. Under a private policy, you can customize coverage to categorize such items in whatever way works best. A policy might also cover living expenses if a flood has forced you out of your home.

In addition, private policies can be stand-alone (they act as your primary flood insurance) or excess (they add coverage over and above what a FEMA policy or other private policy offers).

We’ll have to see precisely how private flood insurance shakes out, as it will evolve along with market conditions and weather events. Regardless, more insurance options — and greater competition among providers — should be a good thing for policyholders.

The NICRIS Insurance team is here to offer advice on the best policies to protect you and your property. Contact us with any questions or to receive a free, personalized review to match the right coverage to your circumstances and potential risks.