California flooding highlights need for strong private flood market

Private flood insurance accounts for more than 40% of California’s entire flood market – a significantly higher share than in other states, according to a recent Best’s Commentary, “Historic California Flooding Highlights Need for Robust Private Flood Market.”

In the commentary, AM Best said that the National Flood Insurance Program (NFIP) has long been inadequate.

“However, the NFIP’s newly implemented Risk Rating 2.0 increased the potential for more private insurers to provide flood insurance options outside the federal program, and according to the commentary, this seems to have taken hold in California,” AM Best said. “Of the states with at least $100 million of direct written premiums in flood insurance, California has the largest share of premium written by the private market, at 41%, compared with 24% nationally.”

However, only 2% of California residents have purchased flood insurance, and California’s NFIP policies represent only 44% of the NFIP’s total policies despite the state boasting approximately 12% of the national population. These numbers indicate that most flood losses suffered by businesses and homeowners in the state won’t be covered by insurance, AM Best said.

NFIP inadequate

“Homes in California protected by the NFIP may still be underinsured, given that NFIP insurance is limited to $250,000 per residence – well below California’s median home value of nearly $685,000, the second-highest in the country,” said Christopher Graham, senior industry analyst at AM Best. “Many homes covered by the NFIP would benefit from an excess policy above the NFIP coverage limit, so opportunities abound for private flood insurers willing to take the risk.”

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While private flood insurance has historically been profitable for California’s top five flood writers, the damage from the current storms may be enough to erase several years of good results, AM Best said.

However, the rating agency also pointed out that the state insurance regulator recently directed that mudslides – which are typically covered by flood insurance – are to be covered under homeowners or other property policy as a fire loss if the hill from which the mudslide emanated was previously weakened by fire.

While the total economic loss would be unaffected, the directive may shift some of that loss from flood policies to other property policies, AM Best said.

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