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1、The Emerging Private Residential Flood Insurance Market in the United States AThe Emerging Private Residential Flood Insurance Market in the United StatesCarolyn Kousky,Howard Kunreuther,Brett Lingle,and Leonard ShabmanReport 23-03 July 2018Resources for the FutureiAbout the Authors Carolyn Kousky i
2、s the Associate Vice President for Economics and Policy at Environmental Defense Fund and a nonresident fellow at RFF.Dr.Kouskys research examines multiple aspects of climate risk management and policy approaches for increasing resilience.Howard Kunreuther is the James G.Dinan Professor Emeritus,Ope
3、rations,Information and Decisions(OID)Department at the Wharton School at the University of Pennsylvania.He has a long-standing interest in ways that society can better manage low-probability,high-consequence events related to technological and natural hazards.Brett Lingle manages the First Street F
4、oundation Flood Lab,an initiative that brings together the nations top academic researchers to study and report on the past,present,and future financial and economic impacts of flooding in America.Leonard Shabman is a senior fellow at RFF.His ongoing work focuses on protocols for water development p
5、rojects and ecosystem restoration programs,design of market-like environmental management programs,and increasing the effectiveness of national flood risk management and disaster aid programs.Acknowledgements This report is based on work supported by the Science and Technology Directorate of the US
6、Department of Homeland Security for the Flood Apex Program under Contract HSHQDC-17-C-B0032.The views and conclusions contained in this document are those of the authors and should not be interpreted as necessarily representing the official policies,either expressed or implied,of the US Department o
7、f Homeland Security.The authors would like to thank the following individuals for their helpful comments:Clark Poland,Paul Huang,David Alexander,Liz Asche,Flood Apex program experts,Katherine Greig,all the stakeholders whom we interviewed(see Appendix 1),and those that reviewed a draft of the report
8、.The authors would also like to thank the Federal Emergency Management Agency for assistance with supporting data,and in particular,Scott McAfee and Andrew Martin.Finally,we would like to thank Xiao Wu for assistance with map production.This report was originally published by the former University o
9、f Pennsylvania Wharton Risk Management and Decision Processes Center,which was replaced by the Wharton Environmental,Social and Governance Initiative in 2022.https:/esg.wharton.upenn.edu/.This report is being republished by Resources for the Future by the author(s).The Emerging Private Residential F
10、lood Insurance Market in the United States iiAbout RFFResources for the Future(RFF)is an independent,nonprofit research institution in Washington,DC.Its mission is to improve environmental,energy,and natural resource decisions through impartial economic research and policy engagement.RFF is committe
11、d to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.The views expressed here are those of the individual authors and may differ from those of other RFF experts,its officers,or its directors.Sharing Our WorkOur wo
12、rk is available for sharing and adaptation under an Attribution-NonCommercial-NoDerivatives 4.0 International(CC BY-NC-ND 4.0)license.You can copy and redistribute our material in any medium or format;you must give appropriate credit,provide a link to the license,and indicate if changes were made,an
13、d you may not apply additional restrictions.You may do so in any reasonable manner,but not in any way that suggests the licensor endorses you or your use.You may not use the material for commercial purposes.If you remix,transform,or build upon the material,you may not distribute the modified materia
14、l.For more information,visit https:/creativecommons.org/licenses/by-nc-nd/4.0/.Resources for the FutureiiiExecutive SummaryThe federal National Flood Insurance Program(NFIP)underwrites the overwhelming majority of residential flood insurance policies in the United States.As of April 2018,more than 5
15、 million NFIP policies were in force nationwide(4.8 million residential),representing slightly more than$1.28 trillion in coverage($1.17 trillion residential).For decades,the NFIP has been homeowners only option for flood insurance,but over the past several years,a small private market for residenti
16、al flood insurance has emerged.Policymakers are increasingly interested in learning whether the expansion of this market could help meet the policy goals of increasing the number of homeowners with flood insurance or offering more affordable coverage.Stakeholdersin congressional testimony,op-eds,rep
17、orts,and other forumshave offered diverging opinions as to the appetite of the private sector in writing more flood insurance,on the existing barriers to private coverage,and on the implications for the NFIP.The present state of the market is unclear,particularly since there is no nationwide databas
18、e on the companies writing residential flood insurance,coverages offered,policy terms,pricing,and any differences between private and NFIP flood insurance.This makes it difficult to evaluate the markets future evolution and relationship to the NFIP.This report aims to fill these knowledge gaps and h
19、as two primary objectives:1.to document the current state of the private,residential flood insurance market across the United States;and2.to identify the main factors influencing the number and form of flood insurance policies offered by the private market.To meet these objectives,we conducted in-de
20、pth,semi-structured interviews with 63 insurers,reinsurers,state brokers,and other market participants.We also gathered and analyzed current private market data from a range of sources including public documents,congressional testimony,news articles,state regulators,and private firms.The Emerging Pr
21、ivate Residential Flood Insurance Market in the United States ivKey Findings The private residential flood insurance market in the United States is currently small relative to the NFIP.We estimate that private flood insurance accounts for roughly 3.5 to 4.5 percent of all primary residential flood p
22、olicies currently purchased.With the exception of Puerto Rico,more policies are written by surplus lines carriers than by admitted carriers subject to state rate and form regulations.This is unsurprising,since surplus lines firms tend to cover new or catastrophic risks for which consumers may have t
23、rouble finding coverage in the admitted market.Roughly 20 percent of private residential flood policies(and 40 percent of admitted carrier policies)are in Puerto Rico;another roughly 20 percent are in Florida.No data are available to evaluate the size of the total private market in other states or a
24、t a substate level nationwide.Private market growth to date has largely been driven by the interest of global reinsurers in covering more US flood risk.In the admitted market,reinsurers are assuming most of the risk for primary insurers,often in excess of 90%.In the surplus lines market,Lloyds of Lo
25、ndon has played a major role,backing the majority of residential flood policies.Among the small number of policies written by the private sector,we identified three broad policy types.The most prevalent is what we refer to as an“NFIP+”policy within the FEMA-mapped 100-year floodplain,where flood ins
26、urance is required for federally backed mortgages.NFIP+policies have higher limits and/or broader coverages than NFIP policies.Most are stand-alone policies,although some are sold as endorsements to homeowners policies.A second type is a lower coverage limit policy issued as an endorsement in lower
27、risk areas.The third type,used by only a couple of firms,mimics the NFIP policy.There does not exist data to ascertain how many homeowners previously uninsured against flood are purchasing private policies versus how many are switching from NFIP policies to private coverage.Insurers in the market be
28、lieve their portfolios include both newly insureds and policyholders switching from the NFIP.Since the NFIP will provide a policy to anyone in a participating community,private firms can operate only where they can price lower than the NFIP or provide broader or different coverages for which there i
29、s consumer demand.In a sense,then,the NFIP is a default benchmark for comparison with private flood insurance policies.Companies have identified certain types of properties or risks where they believe they can profitably operate and compete with the NFIP.Those target areas of opportunity,however,var
30、y across firms.For example,some are restricting themselves to areas FEMA designates as lower flood risk and others are focusing on areas FEMA designates as at higher flood risk.The largest US homeowners insurance companies have generally been Resources for the Futurevhesitant to enter the flood mark
31、et,although a few have begun to enter through subsidiaries.Their caution,we learned,stems from concern about being unable to adjust rating or policy coverages as they gain experience in writing flood because of state regulatory practices;concentration of risk in their portfolio;correlation of flood
32、with existing wind exposure;satisfaction with the current arrangement;and concern about reputational risk should they need to raise premiums or scale back coverage as they explore the potential flood market.More private capital is now willing to back private flood coverage in the United States.Inter
33、viewees agreed that as insurers familiarity with flood catastrophe models grows,as underwriting experience develops,and as state regulatory structures evolve,the number of private flood policies in force could continue to grow,including among admitted carriers.As of this writing,there were multiple
34、new rate filings in many states,suggesting a continued expansion of the market.Whereas the NFIP is required to take all risks,private insurers are selective in their underwriting.All interviewees agreed that the private sector will never be able to write policies for certain properties or locations(
35、e.g.,repetitive loss properties or high-tide flooding areas)at a price homeowners would be willing to pay.Substantial public investment in risk reduction,combined with aggressive land-use management,they said,was essential for limiting future exposure and encouraging the private sector to move into
36、those areas.The private market participants we interviewed differed as to how much flood risk in the US,and storm surge risk in particular,they thought could be underwritten by the private sector.All agreed there would likely remain a large and important role for the NFIP to play,particularly in the
37、 near-term.Acceptance of private flood insurance by banks and financial institutions does not appear to be a major constraint on the market at present.With very few exceptions,private insurers have told us banks ultimately accept their products,though they may have some initial questions or concerns
38、.There is a need for expanded insurance agent education about flood risk and flood insurance products,both for the NFIP and private policies.Interviewees disagreed about whether the higher-than-market commissions paid by the NFIP were creating a disincentive for the private market.Most interviewees
39、saw limited demand for flood coverage today,whether offered by the NFIP or by a private provider,and said that consumers were price sensitive.The Emerging Private Residential Flood Insurance Market in the United States viContents1.Introduction 12.Approach of This Report 33.Residential Flood Insuranc
40、e Today 43.1.Overview of Private Flood Insurance 43.2.Background on the NFIP 63.3.The Flood Insurance Gap 113.4.Market Structure 123.4.1.Admitted versus Excess and Surplus 123.4.2.Policy Distribution 143.4.3.Reinsurance 153.4.4.Overview of the Residential Flood Market 173.5.Analysis of Private Insur
41、ers 183.5.1.Types of Firms 193.5.2.Policy Terms 223.5.3.Pricing and Underwriting Strategies 243.6.State Analysis 283.6.1.Texas 313.6.2.Florida 323.7.Market Evolution 344.Market Drivers 364.1.Interaction with the NFIP 364.1.1.WYO Program 364.1.2.The Mandatory Purchase Requirement and Lender Acceptanc
42、e 374.1.3.Rate Competition 394.1.4.Data and FIRMs 394.1.5.Use of Forms 404.1.6.Continuous Coverage and Mid-Term Refunds 414.2.Managing Catastrophic Risk 424.2.1.Data and Modeling 424.2.2.Reinsurance for Managing Catastrophic Risk 44Resources for the Futurevii4.2.3.Managing Concentration 464.2.4.Stat
43、e Regulation and Legislation 464.3.Agents 494.4.Demand 514.5.Exposure Management 525.Implications for the Future of Flood Insurance 546.References 58The Emerging Private Residential Flood Insurance Market in the United States 11.IntroductionFlood insurance is a necessary component of household and c
44、ommunity resilience.Flood insurance provides reliable financial assistance to cover the costs of repair and rebuilding without the need to draw down savings,divert consumption,or take on debt.Insurance provides greater and timelier assistance than federal disaster aid,which may take months or years
45、to reach victims,and the aid may be poorly matched to needs(e.g.,Talbot and Barder 2016;Fernandez et al.2017).Federal assistance is not available after every flood and more limited than many realize.1 Insured property owners are more likely to rebuild;a study from the Department of Housing and Urban
46、 Development found that insured households were 37 percent more likely to have rebuilt their homes after Hurricanes Katrina and Rita(Turnham et al.2011).While flood insurance is thus valuable to everyone,it may be particularly critical for low-and middle-income families that lack enough savings to f
47、inance their recovery or have a lower capacity to take on debt.Unfortunately,these are also often the households that can least afford flood coverage.Despite the known benefits of insurance,there is a large and persistent flood insurance gap in the United States.FEMA estimates that the residential f
48、lood insurance market penetration rate in the 100-year floodplain(also known as the special flood hazard area,or SFHA)is approximately 30%.Outside the 100-year floodplain,take-up rates are very low.New York City(2013),for example,estimates that fewer than 20 percent of those inundated by Hurricane S
49、andy had flood insurance,in part because Sandys storm surge pushed beyond SFHAs.More recently,less than a fifth of those most affected by Hurricane Harvey had flood insurance(Long 2017).Some observers have cited the flood insurance gap as an opportunity for private market growth,with the US flood ma
50、rket estimated at$30 billion to$50 billion in revenue(Hayes and Kulik 2017;Michel-Kerjan and Taglioni 2017).For the past 50 years,the flood insurance that has been written in the United States has been almost exclusively through the National Flood Insurance Program(NFIP).Flood policies have been wri
51、tten by the private sector for commercial properties and also for residential“excess”policies,which provide private coverage above the$250,000 NFIP residential building coverage cap,but until recently,very few primary flood policies for residences were offered.In the past few years,however,a small p
52、rivate market for residential flood has emerged.FEMAs Individuals and Households Program(IHP)provides funds to help with essential home repairs,temporary housing costs,and other necessary expenses.It is only to make homes safe and habitable after a flood,not bring them back to pre-disaster condition
53、s.IHP grants are capped at$34,000 for FY 2018,and the average award provides only about$5,000$6,000.Recovery funds are also available through the Disaster Loan Program of the Small Business Administration(SBA),which provides individuals up to$200,000 for repairs.For most disaster victims,SBA loans a
54、re the main source of gov-ernment assistance rather than IHP grants.Funding from either program is available to individuals only if the US president or SBA has issued a disaster declaration.Resources for the Future2Opinions vary on how this market will grow and evolve,including whether that growth w
55、ill help close the coverage gap or just transfer policies from the NFIP to the private sector.Given the cross-subsidies,uniform surcharges,and coarse rating currently used by the NFIP,some believe that private companies will take the lower risk and overpriced policies from the NFIP,leaving it with o
56、nly high-risk properties and underpriced policies(e.g.,Berginnis 2016;Birnbaum 2016).Absent any reform efforts,they say,this would undercut the financial stability of the program.Others believe that pulling exposure from the NFIP is on net positive;that is,the overall exposure reduction is more impo
57、rtant than the fact that remaining policies may have higher loss ratios(e.g.,Poulton 2017;RAA 2017).These observers argue that overall a greater role for the private sector will lower taxpayer exposure to NFIP shortfalls.Similarly,supporters of private market growth have suggested that it will expan
58、d consumer choice and provide more complete coverages,lower prices,and products better matched to household needs.On the other hand,some consumer advocates worry that private market offerings will not increase resiliency if companies offer less comprehensive coverage than the NFIP or cancel coverage
59、 after a consumer experiences a loss or risk levels change.A shift in flood to the private market,they believe,could undercut other NFIP activities,such as public flood mapping and funding of flood mitigation,because these activities are funded by fees on NFIP premiums.This report does not directly
60、address questions about the pros and cons of growth in private coverage.Yet these and other questions cannot be answered without first understanding the current status of private coverage,as well as the opportunities and challenges for growth.This is our focus.The report has two principal objectives
61、:1.to document the current state of the private residential flood insurance market across the country;and2.to identify the main factors influencing the number and form of residential flood insurance policies offered by the private market.We limit our attention to the primary,residential market for f
62、lood insurance and do not examine the lender-placed flood insurance market(insurance purchased by lenders on behalf of consumers to comply with regulations that certain borrowers are required to have flood coverage as a condition for a federally insured mortgage).Although we do not examine commercia
63、l flood policies in detail,it is worth noting that whereas residential policies constitute the majority of the NFIP portfolio,commercial flood policies account for the majority of private flood insurance coverage.The report is organized as follows.Section 2 discusses our methods and the approach tak
64、en for this report.Section 3 provides a snapshot of the current private residential flood insurance market.Section 4 then turns to address drivers of the private market.Section 5 concludes with preliminary observations on the future of the flood insurance market and the interactions of the private a
65、nd public sectors.The Emerging Private Residential Flood Insurance Market in the United States 32.Approach of This ReportNo data are systematically collected on the private residential flood market nationwide.A couple states collect some data on premiums and policy counts(see Section 3.6)and there i
66、s some data collected on all flood insurance including commercial,but no detailed,nationwide,residential-only data.For this reason,our findings are based on in-depth,semi-structured interviews with market participants.Via internet searches,review of news articles,and examination of congressional tes
67、timony and other documents,as well as conversations with market observers,we created a list of all known companies offering or backing residential flood in the United States.We sent out an interview request to every such firm.We also sent interview requests to a sample of other stakeholders,such as
68、insurance regulators in states with many flood policies,some agents writing flood insurance,and associations and non-governmental organizations.Of our 70 interview requests,20 stakeholders did not respond or follow up with us and one declined to be interviewed,such that we interviewed representative
69、s from 49 institutions(70%)and a total of 63 individuals.All these individuals are listed in Appendix 1.We supplemented our interviews by collecting and analyzing all government and industry reports,academic papers,congressional testimony,and other documents we could find related to the private resi
70、dential flood insurance market.All our interviews were semi-structured and lasted between 30 minutes and 1 hour.Most took place on the phone;a few were in person.Following the recommendation of Weiss(1994),before each interview we produced interview guides,which listed our questions and topics for i
71、nquiry.We told participants that their specific statements would be kept confidential unless they gave us permission to quote or paraphrase them in the report.All interviewees agreed to have their names listed in the appendix.The research team then analyzed the interviews and the documents from the
72、comprehensive literature review to develop themes and analytical categories.The basis of this report,therefore,is a high volume of unstructured,text-based information(Ritchie and Spencer 1994).We synthesized this into two categories:current structure of the market(Section 3)and determinants or drive
73、rs of the market(Section 4).We highlight throughout the themes that we heard from multiple interviewees.Attribution to particular firms and interviewees is kept confidential except when a point is in a publicly available document or we had permission to name a person or company.Resources for the Fut
74、ure43.Residential Flood Insurance TodayThis section discusses the current state of the residential flood market in the United States.First,in Section 3.1,we provide a brief overview of private flood insurance broadly and then,in Section 3.2,offer background on the NFIP.In Section 3.3 we document the
75、 flood insurance gap for residential properties.We turn in Section 3.4 to the basic structure of the private residential flood market,including a description of the major market players.Section 3.5 discusses the types of private firms in the market today,the policy terms they are offering,and their
76、pricing and underwriting strategies.Section 3.6 offers a more detailed look at private,residential flood in Texas and Florida,the two states collecting data on these policies.Section 3.7 discusses perspectives on the evolution of the private residential flood insurance market.3.1.Overview of Private
77、 Flood InsurancePrivate insurance is regulated by the states.They license insurance companies and agents,regulate products,oversee rate setting and forms for the admitted market,set solvency requirements,monitor market conduct,and carry out other activities.Their primary objective is consumer protec
78、tion.State regulators often work together through the National Association of Insurance Commissioners,a standard-setting and regulatory support organization created and governed by insurance regulators in all 50 states,the District of Columbia,and US territories.Comprehensive data on the private res
79、idential flood market in the US do not exist,but S&P Global Market Intelligence provide data on the broader market,covering both residential and commercial flood.2 These data show 20 groups and unaffiliated organizations3 offering private flood insurance in the U.S.in 2016 and 30 in 2017(it is possi
80、ble the 2016 data is an underestimate if not all firms fully reported in the first year of data collection).Total premium written in 2017 was approximately$623.5 million.Figure 1 shows the top 10 private flood insurance writerscommercial and residentialby premiums written for 2016 and 2017.Of these,
81、Assurant,AIG,Liberty Mutual(through subsidiaries),and Chubb are also operating in the residential market,and Swiss Re and Berkshire Hathaway are reinsuring residential flood.Commercial flood is estimated to be roughly 64%of all private flood(Carrier Management 2018).2 This data includes the flood po
82、rtion of premiums from all-risk commercial policies.3 These groups and organizations may have one or multiple subsidiaries and/or affiliates that offer private flood insurance.The Emerging Private Residential Flood Insurance Market in the United States 5According to these data,FM Global is by far th
83、e largest flood writer in the United States;it insurers only commercial clients and generally writes all-risk policies(the data shows the portion of premium for the flood peril).For companies that write both commercial and residential flood,the S&P data do not differentiate across these two lines an
84、d are thus of limited use for an examination of the residential flood market.A recent report,however,provides a breakdown of residential flood premium based on data reported to the National Association of Insurance Commissioners(Carrier Management 2018).That report indicates that the largest residen
85、tial writer is Assurant,with over$89.8 million in premium,representing just over 40%of private residential flood premium.The top four writers then include AIG(just over 26%),Swiss Re(just under 19%),and Chubb(just under 4.5%).State-level data show broad growth in commercial and residential flood ins
86、urance.The top 10 states for private flood insurance all saw growth between 2016 and 2017(Figure 2).Florida leads,followed by California,Texas,and New York.Still,the amount written by the private sector is small compared with NFIP premiums.Combining commercial and residential,private sector premiums
87、 were approximately 16 percent of total flood insurance premiums nationwide,with the NFIP responsible for the other 84 percent.Figure 1.Top 10 Writers of Private Flood Insurance by Direct Premiums Written,2016 and 2017Source:S&P Global Market Intelligence.The table includes both residential and comm
88、ercial flood insurance,stand-alone,and excess policies.It excludes sewer and water backup and agriculture coverage for crops.$0$50$100$150$200$250$300Millions Nominal USD 2016 2017FM GlobalOtherChubb Ltd.Allianz GroupAlleghany Corp.Liberty MutualBerkshire Hathaway Inc.Swiss ReAGAIGZurich Insurance G
89、roupAssurant Inc.Resources for the Future63.2.Background on the NFIP Congress established the National Flood Insurance Program in 1968,partially in response to the lack of a robust private market for residential flood insurance.The NFIP operated as a private-public risk sharing partnership until 197
90、8,and in 1979 took its current form(Shabman 2018).Currently housed in FEMA,the NFIP has been the primary provider of residential flood insurance in the United States for the past 50 years.Communities that voluntarily join the program make their residents eligible to purchase flood insurance.Upon joi
91、ning,communities must adopt minimum floodplain management regulations within the mapped special flood hazard area(SFHA),which is the area of the floodplain that has a 1 percent annual chance of flooding.Residential property owners can buy up to$250,000 of building coverage and up to$100,000 of cover
92、age for contents.Commercial clients can insure for up to$500,000 each for their building and contents.Currently,more than 22,000 communities throughout the country participate in the program,and these communities include the vast majority of nations population that is at risk of flooding.(For more d
93、etails on the program,see Kousky 2018.)While NFIP policies can be written by insurance agents directly with the NFIP,the program relies on private companies to help with the sale and administration of policies and settling claims.These firms,referred to as“Write Your Own”(WYO)companies,market polici
94、es and process claims(many use a vendor)in exchange for a fee from FEMA.WYO companies may currently receive up to 31.9 percent of written premiums Figure 2.Private Market Growth,by State(Top 10 States by 2017 Premiums Written),Commercial and ResidentialSource:S&P Global Market Intelligence.$0$10,000
95、,000$20,000,000$30,000,000$40,000,000$50,000,000$60,000,000$70,000,000$80,000,000$90,000,000 2016 2017FloridaIllinoisOhioMassachusettsLouisianaPennsylvaniaNew JerseyNewYorkTexasCaliforniaThe Emerging Private Residential Flood Insurance Market in the United States 7to cover operating and administrati
96、ve expenses and compensate agents.4 We were told by an interviewee that WYO companies may retain 15%-24%of written premium for agent compensation.FEMA reimburses loss adjustment expenses according to a fee schedule coordinated with the company.These approximately 70 WYOs bear none of the risk and ar
97、e not involved in rate setting.The top three WYO companies nationwide are Wright,Assurant,and Allstate(FEMA 2015);together they accounted for 42%of all NFIP policies as of May 31,2017.In the programs first few years,very few households purchased flood insurance.In response,Congress passed the Flood
98、Disaster Protection Act in 1973,which required property owners located in a 100-year floodplain with a loan from a federally backed or regulated lender to purchase flood insurance.Referred to as the mandatory purchase requirement,this led to a substantial increase in the take-up or purchase of flood
99、 insurance.As of April 2018,more than 5 million total policies were in force nationwide,representing more than$1.28 trillion in coverage(4.8 million policies were residential representing$1.17 trillion in coverage).The number of policies in force grew fairly steadily until 2009 but has been declinin
100、g since then(Figure 3).Premium and fee increases required by 2012 and 2014 reform legislation(see below)may have caused some policyholders to drop coverage,although growth stalled before these changes.As noted,FEMA maps flood hazards for communities on Flood Insurance Rate Maps(FIRMs),which delineat
101、e different flood zones.The SFHA comprises two zones:the A zone and the V zone.A zones are inland floodplains and coastal floodplains subject to waves of less than 3 feet.V zones are narrow strips on the coast subject to breaking 4 As of October 2018,the maximum reimbursement will be lowered to 30 p
102、ercent of writ-ten premiums,as per a notice in the Federal Register by FEMA on March 16,2018(83 FR 11772).Figure 3.Total NFIP Policies in Force Nationwide,19782017$01,000,0002,000,0003,000,0004,000,0005,000,0006,000,000036925199619971
103、99804200520062007200820092000162017Resources for the Future8waves of at least 3 feet.SFHAs generally also show the base flood elevation(BFE)or the estimated height of waters in a 100-year flood.FIRMs also map the 500-year floodplain and beyond it,referred
104、to as the X Zone.NFIP contracts in force are heavily concentrated geographically in coastal counties(Figure 4).(FEMA differentiates between contracts in force and policies in force for multi-unit structures.An insured structure counts as one contract in force,but if that structure has multiple units
105、 that are covered under one contract,each unit is counted as a policy.So,for example,a 50-unit condominium building is one contract but 50 policies.)As of February 2018,just three statesFlorida,Texas,and Louisianaaccounted for slightly less than 60%of all contracts nationwide.Despite an apparent con
106、centration of NFIP policies in hurricane-prone coastal communities,many of these contracts are in the A zone,outside the area mapped as at risk of high storm surge.The V zone accounts for only about 1 percent of policies nationwide.As of April 2018,the median premium(including fees)across all reside
107、ntial policies was$516 and the mean was$951.The 99th percentile premium was$6,053.5 NFIP premiums vary across zones(in A zones,for example,for all residential policies,the median premium was$824)and also by structural characteristics of specific properties.NFIP rating is fairly coarse,as the same ra
108、ting tables are used in large zones across the 5 Thanks to Mitchell Waldner at FEMA for providing the premium statistics.Figure 4.Residential Contracts in Force Nationwide,February 2018Source:Map produced with data from FEMA.The data are divided using Jenks breaks,which maximize the difference betwe
109、en classes.The breaks are not equal intervals,nor are they quantiles.Jenks breaks highlight the geographic concentration of NFIP policies.The Emerging Private Residential Flood Insurance Market in the United States 9country,although differentiated by aspects of the propertynotably elevation relative
110、 to BFE.Multiple cross-subsidies are built into NFIP ratings.(For more details on these,see Kousky et al.2017).These cross-subsidies,combined with a coarse rating system and congressionally mandated uniform surcharges,create a substantial disconnect between the premium paid and the modeled risk for
111、some properties.Three classes of policyholders receive discounted premiums in the NFIP.The first are older homes built before a communitys first flood hazard map(known as a Flood Insurance Rate Map,or FIRM)was issued.These“pre-FIRM”properties have historically received lower rates to encourage progr
112、am participation.FEMA has estimated about 20%of properties receive pre-FIRM discounts.Due to legislation passed in 2012 and 2014,however,these discounts are now slowly being phased out.FEMA provides a second category of lower rates for grandfathered properties.These are structures that,for example,w
113、ere built in compliance with the FIRM in effect at the time of construction,but later mapped into a higher risk zone or to a lower elevation relative to the 100-year flood.Owners of these properties are allowed to continue to be rated based on the lower risk they had before the new FIRM took effect.
114、A third category of discounts is available if a policyholders community participates in the NFIPs Community Rating System and adopts certain risk management practices.The amount of the discount varies with the actions taken by the community and can be as high as 45 percent for homes in the SFHA.Figu
115、re 5.Estimated Take-up Rate of Residential NFIP Contracts in SFHAs,by County,February 2018Source:Produced by the authors with data from FEMA.Take-up rates are based on residential policy contracts and counts of structures.Resources for the Future10Historically,the NFIP has not been able to cover cla
116、ims from catastrophic flood events because of price discounts,inadequate pricing to cover the possibility of high loss years,and congressional decisions not to cover the high claims from concentrated exposure.Congressional commitments had been part of the early NFIP but have not continued to the pre
117、sent(Shabman 2018).When premium funds are insufficient to cover losses,FEMA borrows from the US Treasury.Since 1978,the program has paid out more than$65 billion in claims6 most of which is attributable to just a few catastrophic loss years.As of January 2018,the program was$20.525 billion in debt t
118、o the Treasury.7 The NFIP amassed much of the debt following the catastrophic loss year of 2005 and has been carrying a debt it cannot repay for more than 15 years.In recent years,the program has purchased a small amount of reinsurance on the private market.Reform legislation in 2014 also establishe
119、d a reserve fund,created from an additional 15%assessment on premiums.After the 2017 hurricane season,Congress forgave$16 billion of NFIP debt in lieu of further increasing its borrowing authority.6 Statistics from FEMA website:https:/www.fema.gov/loss-dollars-paid-calendar-year.7 As of January 2018
120、,the NFIPs total claims-paying ability stood at$14.66 billion,includ-ing$9.9 billion in borrowing authority.Figure 6.Percentage of Residential Contracts Outside SFHAs,February 2018Source:Produced by the authors with data provided by FEMA.The Emerging Private Residential Flood Insurance Market in the
121、 United States 113.3.The Flood Insurance GapThe NFIP was initially created because flood insurance was not available from the private sector.Simply making it available,however,did little to increase purchase among those at risk.In 1973,Congress therefore created the mandatory purchase requirement.Al
122、though policies have increased over time,a large and persistant flood insurance gap remains:many households at risk of flooding do not have flood insurance.Figure 5 shows the estimated take-up for NFIP residential contracts in SFHAs by county,based on February 2018 NFIP data.In some areas,such as al
123、ong the Gulf and east coasts,take-up rates are fairly high.In many 100-year floodplains,however,far fewer households are insured.Nationwide,the take-up rate in the SFHA is a little over 30%.Outside SFHAs,flood insurance take-up rates are much lower.Over the past decade,following flood events outside
124、 SFHAs,several reports and news articles have observed that very few of the flooded homes had flood insurance(e.g.,Dixon et al.2013;CoreLogic 2017).Nevertheless,as of February 2018,some 2 million residences outside mandatory purchase areas had voluntarily purchased coverage.This means approximately
125、half of residential NFIP flood contracts in the country are outside SFHAs and not subject to the mandatory purchase requirement.In some parts of the country,the percent of contracts outside SFHAs is even higher.There is residual risk beyond the SFHA,as well as areas with outdated FIRMs,and many home
126、owners appear to be aware of this and choose to voluntarily insure.Figure 6 shows the percentage of residential contracts in force by county that are outside SFHAs.There is a surprising amount of variation around the country,with numerous counties where the majority of contracts are non-SFHA.That sa
127、id,many of the counties with a high number of non-SFHA contracts have a low absolute numberfor example,of the roughly 280 counties with 100 percent of policies located outside the SFHA,only 13 have more than 100 contracts-in-force in total.However,there are some notable exceptions,such as Fort Bend
128、County,TX with nearly 50,000 contracts-in-force and 95%of them outside the SFHA.The argument for closing the flood insurance gap is that insured property owners are better able to recover,and recover more quickly,than those without insurance.Absent insurance,people must depend primarily on personal
129、savings or loans,but these financial resources are likely limited for low-and moderate-income households.If a flood qualifies as a presidentially declared disaster,some federal programs offer loans or grants for rebuilding,but receiving aid to rebuild is far more uncertain and the amounts are far le
130、ss generous than many people believe.Following Hurricane Harvey,for example,the average flood insurance payout was approximately$120,000,whereas uninsured victims eligible for FEMA assistance received just$4,300 on average(FEMA 2017).For this reason,the NFIP has developed a“moonshot”goal of doubling
131、 the number of structures with flood insurance in the United States by 2022 relying on both the NFIP and the private sector.A challenge for policymakers is that those who most need flood insurance for their recoverylower-income householdsare least able to afford the coverage.These at-risk residents
132、should be a target for policymakers when considering the flood Resources for the Future12insurance gap.Indeed,multiple reports have examined how to design means-tested assistance programs to help lower-income families with the costs of both flood insurance and flood mitigation(Kousky and Kunreuther
133、2014;National Research Council 2015;National Research Council 2016;Dixon et al.2017).A recent FEMA report examines the issue of affordability in the program and provides data suggesting that low-and middle-income households may indeed be forgoing insurance(FEMA 2018).Based on Census and NFIP data,FE
134、MA estimates that around 1/3 of the households in the SFHA have flood insurance.Those with a policy have a median household income of$77,000 per year.Those without a policy have a median household income of$40,000,or slightly more than half the income of those with a policy.FEMA estimates that 26%of
135、 current policyholders meet HUD low income definitions but 51%of potential policyholders meet HUD low income definitions.3.4.Market StructureFor the past 50 years,residential flood insurance in the United States has been almost exclusively provided by the NFIP,with a small private market for two typ
136、es of residential policies.The first is lender-placed policies.These are flood policies that a lender purchases on behalf of a borrower when the borrower fails to comply with the mandatory purchase requirement.8 The second is“excess”policies,which are flood policies that provide coverage beyond the
137、NFIP coverage caps.The past few years have seen the incremental development of a broader residential flood market,with policies generally taking one of two forms:standalone flood policies and flood endorsements to homeowners policies.In addition,there are a few difference in conditions policies on t
138、he market to fill coverage gaps in the NFIP policy.Representatives of the private sector firms moving into flood-prone areas note they are motivated by what they see as a market opportunity.This seems to be particularly true for reinsurance companies,which believe they can profitably handle more US
139、flood risk in their portfolios.The US flood market has been characterized as“the largest potential growth opportunity in the property and casualty market”(Deloitte Center for Financial Services 2014).Yet to date it remains quite small.We now turn to a discussion of the players in the market and thei
140、r roles.3.4.1.Admitted versus Excess and SurplusFlood insurance can be written by either admitted or non-admitted companies.Admitted carriers are licensed by the states in which they operate and file their rates and forms with the state regulator.In the case of insolvency,their claims are backed by
141、state guaranty funds up to a limit set by state law.Non-admitted carriers,also called surplus lines carriers or excess and surplus(E&S)companies,though approved 8 Standard homeowners policies can be force-placed,as can flood insurance policies.RAND undertook a study on the lender-placed market a lit
142、tle over a decade ago.At that time,the authors estimated there were roughly 130,000 to 190,000 residential primary lender-placed flood policies(Dixon et al.2007).The Emerging Private Residential Flood Insurance Market in the United States 13by the state,have no requirements on their rates and forms
143、and are not backed by state guaranty funds,but they may have higher minimum solvency requirements than admitted carriers.Rate and form freedom allows them to specialize in potentially volatile marketsnonstandard,unique,complex,or catastrophic risks.Surplus lines firms are usually the first to enter
144、markets for high,new,or unknown risks;once the market matures,admitted insurers may begin to claim greater market share(Donelon and Travis 2017).As the former insurance commissioner for Pennsylvania said in testimony,“after a new coverage has proven itself profitable in the surplus lines market and
145、sufficient data has been gathered to provide a sound basis for rate development,the coverage tends to become a standard product in the admitted market”(Miller 2016).Although E&S companies do have rate and form freedom,it is a misconception that they are not regulated at all.US based surplus lines co
146、mpanies must be licensed in at least one state,which imposes solvency and market conduct requirements.States may also impose other regulations on surplus lines companies.In Pennsylvania,for example,surplus lines insurers can be deemed ineligible to do business in the state if they have unsound finan
147、cials,violate state laws,or do not promptly pay claims(Miller 2017).States also license and oversee surplus lines brokers,discussed below.In all states,surplus lines policies are subject to a surplus lines tax,which is similar in principal to insurance premium taxes imposed on admitted insurers.The
148、surplus lines tax is typically between 3 and 6 percent of the premium,depending on the state.Surplus lines insurers based outside of the United States are overseen by a committee of state regulators through the National Association of Insurance Commissioners.These companies may offer coverage in the
149、 United States once they meet capital and surplus requirements,agree to maintain U.S.trust accounts,and meet“certain character,trustworthiness and integrity requirements”(Kelley 2016).Surplus lines companies are not backed by state guaranty funds but they do face capital requirements and in recent y
150、ears have had a strong track record of solvency and stability.According to global credit rating agency A.M.Best(2017),97 percent of surplus lines insurers had“excellent,”“superior,”or“exceptional”ratings,compared to 78.6 percent of companies in the overall property and casualty market.A.M.Best also
151、reported that from 2004 to 2015,the surplus lines industry recorded zero financially impaired companies,9 whereas the admitted market reported 217.That said,a comparison of financial impairment frequency(FIF)10 suggests that the solvency differences between surplus lines and admitted insurers are le
152、ss stark.From 1977 to 9 A.M.Best classifies an insurer as financially impaired when a state insurance department takes its first official regulatory action against that insurer.Such actions may include“involuntary liquidation because of insolvency as well as other regulatory processes and procedures
153、 such as supervision,rehabilitation,receivership,conservatorship,a cease-and-desist order,suspension,license revocation,administrative order,and any other action that restricts a companys freedom to conduct its insurance business as normal”(A.M.Best 2015).10 The FIF is calculated by dividing the num
154、ber of insurers that become impaired in a given year by the total number of firms in the market that year.Resources for the Future142015,the admitted markets FIF was 0.86 percent,and the FIF for the surplus lines market was somewhat lower,at 0.74 percent(A.M.Best 2016).We also heard that agents play
155、 a role in promoting solvency in the E&S market because they often place customers with financially strong surplus lines companies;agents may have less motivation to do this when it comes to placing admitted policies,since they know the consumer would be backed by a state guaranty fund.In most state
156、s,insurance laws and regulations require agents to make a diligent effort to place risks in the admitted market before turning to a surplus lines carrier.This generally means that a risk must be denied by three or more admitted insurers before it can be placed in the surplus lines market.However,sta
157、te regulators may waive these“diligent search”requirements for certain types of insurance products and coverages that are difficult to place with admitted carriers.11 For flood insurance,19 states have waived the requirement to varying degrees,13 have no restrictions on accessing surplus lines for f
158、lood,five allow direct access for excess flood coverage,four allow direct access when an insureds community does not participate in the NFIP,and one(Nevada)allows direct access for the lender-placed market(Table 1).3.4.2.Policy DistributionAdmitted and E&S insurers take different approaches to distr
159、ibuting their policies.Admitted insurers write policies directly to a customer,through a captive agent who writes only their policies,through independent retail agents who connect consumers to insurers and provide quotes from multiple companies,or may access business through brokers and managing gen
160、eral agencies.E&S insurers tend to work with wholesalers or brokersintermediaries between a retail agent and an E&S insurer who work on behalf of the insurance agency to access the E&S market.The broker must have a surplus lines license and a standard license for selling property and casualty insura
161、nce(unless 11 These could also be waived if the insured qualifies as an Exempt Commercial Purchaser or Industrial Insured,meaning they are of a relevant size and employ a qualified risk manager to purchase insurance.This,obviously,would not apply to residential policies.Table 1.States Diligent Searc
162、h Requirements for Private Flood InsuranceRequiredAL,AR,CO,DE,DC,GA,HI,IL,IN,IA,KS,KY,ME,MA,MN,MS,MO,MT,NE,NH,NC,ND,OH,OR,PR,SC,SD,TN,TX,UT,VT,WA,WYFully waivedAK,AZ,CT,FL,ID,LA,NJ,OK,PA,RI,VA,WV,WIDirect access for excess onlyCADirect access for excess and non-NFIP communitiesMD,MI,NM,NYDirect acce
163、ss for lender-placedNVThe Emerging Private Residential Flood Insurance Market in the United States 15the state has reciprocity standards where no underlying property and casualty license is required).In addition,many E&S companies work with wholesalers known as managing general agencies(MGAs)or mana
164、ging general underwriters(MGUs).An MGA/MGU works on behalf of the insurer and organizes and manages its book of business.The MGA/MGU will employ the underwriters,develop premium-setting practices,issue policies on the insurers behalf,and manage claims payments.They get a fee or share of premiums for
165、 these services.An MGU,as opposed to an MGA,also undertakes the underwriting.MGAs vary significantly in their size and scope.Some offer a wide range of E&S products;others focus on only a specific category of coverage or just one product.Some operate nationally;others work only in a given region or
166、locality(Hull 2002).3.4.3.ReinsuranceReinsurance protects insurers against catastrophic losses and helps diversify risks globally.Reinsurance has been and will continue to be critical to the growth and development of the US private flood insurance market by helping insurers spread risk in the same w
167、ay that insurance plays this role for homeowners.For US flood,reinsurers are playing a large role in the market,although relationships with primary insurers vary.We identified two dominant types of reinsurance relationships for residential flood.In the first,the reinsurer simply provides the financi
168、al protection,but takes on a substantially greater share of the risk than is standard for property insurance.This may be done as a separate agreement and not rolled into other existing reinsurance treaties,such as a catastrophe excess of loss contract.We heard the reinsurance sector often takes in e
169、xcess of 90%of the flood risk in a quota share modelmeaning,the reinsurer would take 90%of flood premiums and pay 90%of flood claims.Several interviewees told us they expected that as a primary company became more comfortable writing flood,it would keep more of the risk and move to a more traditiona
170、l excess-of-loss reinsurance contract.In the second dominant model,the reinsurance company offers a white label or turn-key flood product.These products are fully designed by the reinsurer.In this way,the reinsurer takes on many functions traditionally done by the primary insurance company,such as s
171、etting underwriting guidelines,rating,and developing forms.Many large reinsurers have their own flood models and use this expertise to design the policy.They then also back their productagain,perhaps in excess of 90 percent,even 100 percent initially.For example,Hiscox Re offers a turn-key flood ins
172、urance product called FloodXtra that personal lines insurers can add to homeowners policies.Hiscox provides interested insurers with forms,rules,rates,an underwriting portal,a pricing system,and reinsurance(Insurance Journal 2017).Flood,it should be noted,is not the only peril for which reinsurers o
173、ffer white label products.Resources for the Future16Multiple reinsurance companies are in the US flood market,including many backing the NFIP.Lloyds of London in particular has been playing a large role in the development of the US flood insurance market.Dating back to the 1700s,Lloyds is a speciali
174、st insurance market where insurers can find coverage for rare or challenging risks.A company needing a particular insurance coverage takes information to a broker,who then discusses it with underwriters for different syndicates.There are close to 100 syndicates.These are one or more members(usually(
175、re)insurance companies or other companies)that provide capital for the risks they accept.Syndicates are managed by a managing agent.Lloyds has a chain of capital to back all underwritten risks.Lloyds syndicates stand behind many types of flood risk in the United States:the NFIP,commercial,lender-pla
176、ced,and residential.Given their position in the US flood market,Lloyds syndicates continue to develop a more enhanced understanding of US flood exposures to support more accurate pricing of such exposures.In the private flood market,many MGAs are Coverholders for Lloyds syndicates.Coverholders are c
177、ompanies or partnerships authorized by a syndicate to enter into insurance contracts on behalf of the syndicate.12 The Coverholders authority and responsibilities are defined in a“Binding Authority”agreement and may include the ability to set rates,underwrite,issue policies,collect premiums,and/or h
178、andle claims.Syndicates use Coverholders to gain access to local markets without having to build the local infrastructure needed to market and sell insurance policies.Coverholders benefit from access to Lloyds underwriters and brokers as well as the organizations financial security and ratings.Among
179、 the MGAs we identified,all but two(The Flood Insurance Agency,which is backed by Lexington/AIG and Prospect General,which is backed by Palomar Specialty Insurance Co.)offer private flood coverage backed by Lloyds.Most offer coverage through Lloyds only,but some offer products backed by Lloyds and o
180、ther carriers.We estimate that Lloyds directly holds the risk for approximately 50 to 60%of surplus lines flood policies and about 20 to 30%of all private flood policies.However,Lloyds likely holds even more private flood risk by providing reinsurance to admitted companies as well.While reinsurance
181、is thus key to the development of the U.S.residential flood market,a couple of interviewees expressed caution on the sustainability of this relationship.Since reinsurance rates are not regulated the way primary insurance premiums are by state regulators,reinsurers can increase rates quickly in respo
182、nse to a bad loss year or revisions in catastrophe models,for example.This could then strain insurers and be passed on to their policyholders.An interviewee told to us that a market so inherently reliant on reinsurance could be prone to instability.12 For more information,see https:/ Emerging Privat
183、e Residential Flood Insurance Market in the United States 173.4.4.Overview of the Residential Flood MarketFigure 7 depicts the structure of the residential flood insurance market in the United States.A consumer can purchase flood insurance either through the NFIP(blue)or through the private market(r
184、ed).The figure shows the links from the consumer to the ultimate risk holder.In this section,we walk through a consumers options for obtaining residential flood coverage.We estimate that more than 95 percent of the residential flood polices sold are currently purchased through the NFIP.13 Specifical
185、ly,we estimate that the private residential flood market accounts for 3.5 to 4.5 percent of the total residential flood market in terms of number of policies sold(see Section 3.5.1),but it is growing.A property owner who wants to purchase a flood insurance policy typically contacts a retail insuranc
186、e agent.To write an NFIP policy,the agent must have completed the 13 This is in line with the few other estimates we have seen.For example,WSIA(2018)ex-trapolated data from nine states to estimate that primary residential flood insurance with surplus lines carriers was just over 2%.Since the admitte
187、d market is of a similar size,this comports with our estimate.Figure 7.Structure of the Residential Flood Market3-4%privateConsumerTreasuryTPARetail agent$ReinsurerAdmitted insurerE&S insurerNFIPWYOMGA/MGU96-97%NFIPResources for the Future18NFIP training required by the state and be appointed by the
188、 insurer or MGA providing coverage.The agent searches for the best policy options available based on the propertys flood risk,typically by entering information about the property into an online portal,which then determines what types of coverage the consumer is eligible for and at what price.An agen
189、t will not usually have access to all available product offerings.If the agent is qualified to write both NFIP and private coverage,they may quote both types of policies or the one they feel is best for their client.Depending on the price and coverages,the consumer may choose to go with the NFIP or
190、a private carrier.(For more discussion of the role of the agent in the private flood insurance market,see Section 4.4.)If a customer chooses an NFIP policy,the agent will place the risk with a WYO company operating on behalf of the NFIP.Some policies,such as severe repetitive loss14 properties,may b
191、e placed directly with the NFIP through the Special Direct Facility.WYO companies typically rely on third-party administrators(TPAs),such as Marshs Torrent Technologies and Aons National Flood Services,to carry out NFIP-related tasks.WYO companies may rely on TPAs to quote NFIP premiums,communicate
192、with policyholders,collect premiums,handle claims,provide IT services,and manage finances,including passing on premium dollars to the NFIP.Often,agents will work through TPAs to place policies,as well.For some WYO companies,a customer could bypass the agent and go directly to the company,such as thr
193、ough a website.Alternatively,the property owner could choose a private policy through either the admitted or the surplus lines market.An admitted insurer would then be backed by reinsurance.Admitted companies may also be providing the homeowners policy and then the flood may be an endorsement to tha
194、t policy or they may write excess or standalone flood policies.A surplus lines policy is often done via an MGA.Some MGAs may write directly to consumers,bypassing agents.MGAs may also rely on TPAs for certain services,such as claims handling,while doing policy administration themselves.Behind the MG
195、A is usually an E&S(re)insurer.MGAs provide access to customers for insurers and may provide underwriting expertise,but they do not bear any of the risk.MGA products tend to be standalone flood products.3.5.Analysis of Private InsurersIn this section we report findings based on all private carriers
196、we found active in the residential flood market today.There may be a few insurers,reinsurers,and MGAs offering residential flood policies or bearing this risk that we were unable to identify,particularly since the market is evolving so quickly.New offerings continue to be 14 Severe repetitive loss p
197、roprieties are those with four or more flood insurance claims payments that each exceeded$5,000,with at least two of those payments occurring in a 10-year period,and with the total claims paid exceeding$20,000;or two or more flood insurance claims payments that together exceeded the value of the pro
198、perty.The Emerging Private Residential Flood Insurance Market in the United States 19made available and private insurers continue to expand into new states.15 We believe,however,that the firms for which we do not have information are likely to have only a small number of policies thus far.In this se
199、ction,we first discuss the types of firms writing residential flood policies and their policy terms.We then turn to discussing their pricing and underwriting strategies.3.5.1.Types of FirmsTable 2 lists all those we identified as currently involved in writing residential flood insurance in the Unite
200、d States at the time of our analysis.The majority of these companies offer primary coverage,with many also offering excess policies;a few offer excess flood only.All MGAs we identified were underwritten by a surplus lines carrier.Some offer a range of flood products underwritten by different carrier
201、s.For example,Orchid Underwriters offers primary and excess flood products backed by multiple carriers.In Table 2,a double asterisk(*)indicates the company is also a WYO company for the NFIP.A caret()indicates the company is an admitted carrier that offers flood on the surplus lines market.We estima
202、te that 175,000 to 220,000 private residential flood policies are currently in force in the United States.This is roughly 3.5 to 4.5 percent of the total residential flood market(NFIP plus private flood policies).Seven major surplus lines programs16 account for almost the entire E&S market,which is
203、roughly 70,000 to 110,000 policies nationwide.We identified 26 insurers offering flood on an admitted basis,with more than 100,000 policies in total across the firms.Almost all of these companies also offer homeowners coverage.At least three insurers offer homeowners insurance and other products on
204、the admitted market but offer primary flood coverage on a surplus lines basis(in which case they may not bear any financial risk if fully backed by another entity).Some of these companies are also currently developing or have recently developed their own flood endorsements to be offered in the admit
205、ted market.Roughly 40,000 of the admitted primary flood policies are in Puerto Rico.Two WYO companies found they could consistently underprice the NFIP on the island,largely because of construction practices not accounted for in NFIP rates(for example,concrete buildings that sustained less damage fr
206、om flooding).Whereas the NFIP dominates the residential flood market on the mainland,in Puerto Rico,90 percent of residential flood policies are private.That said,less than 5 percent of households in Puerto Rico have flood insurance,so the insurance coverage gap is large.(For more discussion on floo
207、d insurance on Puerto Rico,see Kousky and Lingle 2018.)Currently,WYO companies may not directly compete with the NFIP by offering standalone,private flood.However,effective October 1,2018,these restrictions are 15 The market is continuing to evolve and we were not able to identify a fully exhaustive
208、 list of companies.In review,two additional firms were brought to our attention:Security First Insurance Company and Johnson and Johnson.Additionally,as we were writing this report,Neptune,a Lloyds backed MGA,was expanding into new states(Simpson 2018).16 These include:The Flood Insurance Agency,Ass
209、urant,Poulton Associates/NCIP,Superi-or Flood,Dual,NFS Edge,and Tower Hill/RenaissanceRe.Resources for the Future20Table 2.Residential flood insurance firms active in the United StatesMGA/MGUSurplus Lines Carriers/GroupsAdmitted Carriers/GroupsReinsurerClearwater UnderwritersAssurant*AIG GroupBerksh
210、ire HathawayDualChubbAmerican Bankers Insurance Co.of Florida(Assurant subsidiary)*Hanover ReFlood SimpleHiscox(Lloyds syndicate)American Integrity Insurance Co.of FloridaHiscox ReGridiron Insurance UnderwritersLexingtonAmerican National Property and Casualty Co.Markel Corp.Homeowners Catastrophe In
211、surance Co.LibertyASI Group*Munich ReInsurmark CatastropheLloydsCentauri Insurance Co.*RenaissanceReNational Risk SolutionsValidus Group/Western WorldCincinnati Insurance Co.Swiss ReNeptune FloodCoastal American Insurance Co.Tokio MarineNew England Flood InsuranceEdison Insurance Co.NFS EdgeFederal
212、Insurance Co.(Chubb Subsidiary)Prospect General Insurance AgencyFlorida Peninsula Insurance Co.Orchid UnderwritersGolden Bear Insurance Co.Poulton Associates/Natural Catastrophe Insurance ProgramHomeowners Choice Insurance Property&Casualty Co.Superior Flood Inc.Ironshore*(Parent company,Liberty Mut
213、ual,is a WYO company)SWBCKingstoneThe Flood Insurance AgencyMAPRFRETrusted FloodPalomar Specialty Insurance Co.TWFG InsuranceSafe Harbor Insurance Co.WNC Insurance ServicesSafeco*(Parent Company,Liberty Mutual is a WYO company)Winchester General AgencySouthern Oak Insurance Co.Wright*The Philadelphi
214、a Contributorship*Tower Hill*TypTapU.S.Coastal Insurance Co.United Surety&Indemnity Co.*Universal Insurance Co.of North America*Weston Insurance Co.Note:This table may not be fully exhaustive.It is all private firms we identified that had written residential flood policies as of July 2018.Insurance
215、groups consist of subsidiary insurance companies,some of which may offer private flood insurance.Individual insurers are single companies that offer private flood coverage.*Indicates the company is also a WYO company for the NFIP.Indicates the company is an admitted carrier that offers flood on the
216、surplus lines market.For these offerings,these companies are essentially functioning as MGA/MGUs.The Emerging Private Residential Flood Insurance Market in the United States 21being eliminated(discussed further in section 4.1.1).Today,11 WYO companies offer primary flood insurance as an endorsement
217、or as a standalone product.Due to the regulations that will be rescinded,their standalone products are either coupled with other coverages(such as vandalism,as is the case in Puerto Rico(Kousky and Lingle 2018),offered through a subsidiary or affiliated company,or offered through a surplus lines car
218、rier.Surplus lines companies tend to write standalone policies rather than endorsements to homeowners insurance;admitted companies generally lean in the other direction.To offer an endorsement,companies must first offer standard homeowners insurance policies.Because homeowners insurance is widely av
219、ailable in the admitted market,fewer surplus lines insurers offer homeowners coverage and associated flood endorsements.Figure 8 shows the types of flood policies offered by admitted and surplus lines companies that are active in the residential flood market(this does not include excess coverage).Cl
220、ose to 70%of admitted companies offer a flood endorsement,whereas only 10%of surplus lines companies do.And whereas 35 percent of admitted companies offer a stand-alone flood product,more than three-quarters of surplus lines companies offer stand-alone flood.In general,the large US homeowners compan
221、ies have not yet entered the flood market.We were told there were several reasons for their hesitancy.If they start offering flood widely,they could sustain large losses from the correlated exposure on the sheer volume of policies they write:any mistake could be very costly.We were also told that Fi
222、gure 8.Distribution of Policy Types for Admitted Companies and Surplus Lines ProgramsNote:There are two surplus lines programs for which we could not identify the type of policy offered.Among the programs we identified,all offered stand-alone coverage and at least one offered both stand-alone and en
223、dorsement policies.0%10%20%30%40%50%60%70%80%90%100%35%StandaloneEndorsement Admitted Surplus LinesBoth76%69%10%10%8%Resources for the Future22these firms wish to maintain a similar customer experience across all regions where they write policies,and thus they are unlikely to experiment with a diffe
224、rent product in just one small area.They are also concerned about whether state regulators will allow them to adjust rates and policies in response to new information.Finally,they may be worried about price volatility in the reinsurance market.For these reasons,the companies tend to be cautious;they
225、 are not the innovators and first movers of this market.That said,the policies of large property and casualty companies may likely be what ultimately determine how extensive the supply side of the private market becomes,as well as the role of the private sector in closing the flood insurance gap.If
226、these firms begin adding flood as an endorsement to their homeowners policies,the number of households with flood coverage could grow dramatically.An overwhelming majority of stakeholders we spoke with indicated that if flood could be included as the default in homeowners policies,myriad benefits wo
227、uld accrue to both the companies and the insured.Once one of these large companies begins to include flood in its homeowners coverage,we were told,likely competitors will follow.(The advantages and challenges of an all-peril homeowners policy that would include flood are discussed in Kunreuther 2018
228、a.)3.5.2.Policy TermsAfter 50 years of NFIP-dominated residential flood coverage,it is perhaps not surprising that the programs policy is a benchmark for private residential flood coverage.It is worth stressing that more than 95%of the total residential market is still served by the NFIP.Among the f
229、ew private policies,however,we identified three strategies or policy types.The first and most prevalent is what we refer to as an“NFIP+”policy,usually offered within the SFHA.This is a policy that has broader coverage than the NFIP.This is most often a stand-alone policy but there are also a few NFI
230、P+endorsements on the market.The second is a lower coverage endorsement to homeowners policies.Many of these are targeted explicitly outside the FEMA-mapped 100-year floodplain.The third approach,which we do not discuss further,and is used by only a couple firms,is to mimic the NFIP policy very clos
231、ely.NFIP+policies focus on SFHAs and offer the NFIP basic policy with additional coverages and higher limits.These policies are likely to meet the current requirement that private insurance coverage be at least as broad as an NFIP policy to satisfy the mandatory purchase requirement(see Section 4.1.
232、2).For example,almost all insurers and MGAs offer building coverage that meets or exceeds the NFIP limit of$250,000.For admitted carriers offering nonexcess flood in SFHAs,16 of 26(just over 60 percent)offer coverage that exceeds the NFIP limit.Four of 26(roughly 15 percent)offer matching coverage l
233、imits;for an additional four firms,we are uncertain about the specifics.For MGAs/MGUs offering nonexcess flood policies in SFHAs,at least 10 of 20 offer coverage(both building and contents)that exceeds the NFIP limits,four of 20 match the NFIP limits,and the specifics of six are unknown.Among the st
234、and-alone products whose coverage caps exceed the NFIP limits,coverage limits range from$500,000 for buildings and$250,000 for contents to a maximum combined coverage The Emerging Private Residential Flood Insurance Market in the United States 23cap of$15 million for both building and contents.Among
235、 these firms,the average coverage limits are approximately$2.7 million for the building and$2.2 million for contents.One regulator told us that forms and coverages for these policies tend to mimic the NFIP policy,making it easy for lenders to demonstrate that it complies with the mandatory purchase
236、requirement.That said,we also heard several ways in which companies were specifically rejecting NFIP terms and approaches.For example,many interviewees noted thatunlike the NFIPtheir companies tried to match policy terms to homeowners policies to avoid confusion on the part of the consumer.Relatedly
237、,almost all private policies cover structures and contents on a replacement cost value rather than actual cash value basis,or at least provide the option to do so,as well as offer coverage for additional living expenses.The second strategy is to target properties outside the high-risk areas and offe
238、r flood coverage as an endorsement to homeowners policies.These policies tend to have lower coverage limits,such as$50,000,designed for properties that are highly unlikely to face catastrophic flooding.Many endorsements are turn-key products from a reinsurer.Munich Re,for example,has a flood endorse
239、ment for properties outside(and not within 25 meters)of FEMA A and V zones,which it is offering in all states except Alaska,Hawaii,Louisiana,and Florida(see Munich Re 2016).Hiscox Re has a similar turnkey flood endorsement for lower-risk zones that is available in the contiguous United States except
240、 for the coastal states from Texas to North Carolina.AIG is another large firm offering a flood endorsement in low-risk areas;it is available in 48 states(North Carolina and Alaska are the exceptions)and the District of Columbia.Some small,regional firms are taking a similar approach.This is the str
241、ategy of Coastal American Insurance Company,for example,which writes policies in Mississippi and Alabama(Dolese 2017).Prior to the development of its flood endorsement,Coastal American Insurance Company had required those buying its homeowners policies to also maintain flood insurance through the Co
242、ordination of Benefits endorsement(matching flood coverage to homeowners coverage)(Dolese 2017).As another example,The Philadelphia Contributionship has started offering an endorsement to inland homeowners policies with a maximum limit of$50,000 and a deductible of$500,which covers basements,loss of
243、 use,and debris removal,and has a broad definition of“flood.”17As demonstrated by The Philadelphia Contributionship policy,regardless of the coverage level,many private policiesstandalone or endorsementoften include additional coverages,some of which are typically included in a standard homeowners p
244、olicy.For instance,most offer coverage for additional living expenses,or loss of use,which covers an insureds extra costs while the home is uninhabitable.This may cover expenses such as rent,hotel stays,restaurant meals,and storage fees.Assurant also offers coverage for food spoilage.And multiple fi
245、rms provide coverage similar to the NFIPs Increased Cost of Compliance(ICC)coverage to bring damaged homes into 17 For more information on this product,see https:/ for the Future24compliance with current building regulations,but often for higher limits.The NFIP offers up to$30,000,but the ICC paymen
246、t plus the claim cannot exceed the residential building cap of$250,000.American National offers similar coverage but up to$40,000,AIG and Ironshore offer similar coverage up to$75,000,and Dual offers up to$500,000 for a combination of ICC-like coverage,additional living expenses,and loss avoidance m
247、easures.The NFIP allows policies to take effect immediately if tied to a loan,but otherwise there is typically a 30 day waiting period.This prevents consumers from purchasing a policy when floodwaters are imminent,collecting a claim,and then canceling their policy right after,undermining the financi
248、ng structure of insurance.Many private firms have waiting periods shorter than 30 days,and many also waive the waiting period if the policy is bought at the time of home loan origination but otherwise may have a waiting period of up to a few weeks.Some firms may issue a weather moratorium,which rest
249、ricts the writing of new flood policies immediately prior to or during flood events.Alternatively,some companies exclude coverage for floods in progress,even if it is possible to purchase a policy immediately.For example,there is no waiting period for AIGs flood endorsement,but ongoing flood events
250、are not covered.Many company representatives say that compared with the NFIP,they have made the process of placing a policy much simpler for the agent and less time consuming and confusing for the customer.Although most require consumers to fill out an application and contact an agent to determine e
251、ligibility before binding a flood policy,many private companies are trying to improve the experience of getting a policy for both customers and agents.One firms application has only half the questions that the NFIP asks.A few companies provide immediate online quotes and are automating many function
252、s.Most private policies do not require an elevation certificate(although most insurers will use it if provided,and some require it if the property is in the SFHA).That said,we heard that in at least some cases,quoting and binding a policy through certain WYOs is quicker and easier.Ease for agents li
253、kely varies by firm.Some firms are beginning to innovate with products that differ from the two dominant types,the NFIP+for SFHAs and the flood endorsement outside SFHAs.As an example,USIC-Puerto Rico has recently begun including$3,000 of contents coverage for flood with a zero deductible in some ho
254、meowners policies.To obtain more coverage,a consumer can purchase an NFIP or private policy with a$3,000 deductible,which would be less expensive than lower deductibles.As another example,Assurant offers FlexCash with its policies:$10,000 is paid to the insured in the event of a flood,with no restri
255、ctions on how the funds are used.And NFS Edge offers a product that wraps around NFIP coverage,including basements(for post-FIRM properties),additional living expenses,loss avoidance,septic system plumbing,golf carts,and trailers,with higher ICC payments and optional excess coverage.3.5.3.Pricing an
256、d Underwriting StrategiesNot surprisingly,the pricing and underwriting strategies of the private sector are often quite different from the NFIPs.The NFIP has social goals and objectives,reflected in The Emerging Private Residential Flood Insurance Market in the United States 25mandates from Congress
257、,that private companies do not share.For instance,the NFIP has provided lower rates to those who see their risk change and for policyholders in communities that participate in the Community Rating System,neither of which a private firm would do.They also have mandated surcharges on policies from Con
258、gress that do not apply to the private sector.Nevertheless,because the NFIP is required to take all comers,private companies must compete with it for policyholders,writing where they can offer a policy for a lower premium than that charged by the NFIP or provide broader coverage that consumers value
259、.All company representatives with whom we spoke believed that the coarse rating and cross-subsidies inherent in NFIP pricing resulted in only certain areas where the private sector could offer lower prices.They did not agree about the types of properties where they could be more competitive,however,
260、reflecting private insurers varying risk appetites,modeling,policy types,and approaches.This variation is a strength of the private sector:many firms create many options for the consumer by covering many property types and risks.FEMA flood zones have become the language of flood risk in the United S
261、tates and so we heard market participants at times speaking in these terms as shorthand,and some used them for a first cut at underwriting and occasionally for rating.Although a few firms are essentially mimicking NFIP rating,many more companies have developed their own rate-setting approach that be
262、ars little resemblance to that of FEMA.These companies are using third-party data providers and online databases to obtain information about structures and local conditions(see Section 4.2.1.)For example,the vice president of Golden Bear noted in an interview,that whereas NFIP policies for two homes
263、 in the same FEMA X zone would have the same terms and the same price,the company differentiated pricing based on localized topology in the X zone(Donlon 2017).Whatever its approach to rating,each firm has identified those places where it can effectively compete with the NFIP;these target areas vary
264、 across firms.A handful of firms are interested in taking on risks only outside SFHAs.For example,Golden Bear is targeting low to moderate risk in California where it believes it can price below NFIP rates(Donlon 2017).Another companys representative told us that the coastal A zone and much of the V
265、 zone were not adequately priced by the NFIP,so the firm cannot be competitive in those areas.We heard from another interviewee that the NFIP policies did not sell well outside SFHAs because the price was too high and the policies were not targeted to homeowners needs,creating a niche for the privat
266、e sector.We found that admitted companies were more likely than E&S companies to be targeting outside SFHAs(Figure 9).Resources for the Future26More firms,however,believe they can compete with the NFIP in SFHAs.For instance,one firms representative told us that outside SFHAs,the cost of NFIP policie
267、s was too low,so it has decided not to compete in X zones and to focus exclusively on SFHAs.Someone from another firm thought that NFIPs preferred risk policies in most X zones were underpriced.SFHAs include both coastal and riverine areas and the focus varies by company.One interviewee thought the
268、NFIP was overcharging in coastal areas where homes are elevated and underpricing in X zone areas subject to rainfall flooding,so this company has targeted coastal areas.Another company,however,had determined that almost all NFIP coastal rates were too low and it could never price compete in those ar
269、eas.18 Again,E&S companies are more likely to target SFHAs(Figure 9).This strategy is echoed by the Wholesale and Specialty Insurance Association(WSIA 2018),which found that Lloyds brokers estimated that close to 100 percent of the primary residential flood they had written satisfied the mandatory p
270、urchase requirement.Some companies are targeting pre-FIRM properties,often thought to be risky,because they believe the NFIP has been overcharging on these structures.For example,Evan Hecht,CEO of The Flood Insurance Agency,said that his firm focused on pre-FIRM properties given discounts:“Nearly al
271、l of the 18,500 risks his company has taken from FEMA are subsidized policies,the policies FEMA believes are 4550 percent underpriced.We believe that FEMAs actuarially rated risks are the policies that are not rate sufficient”(Hecht 2017).The representative of another company,however,told us the fir
272、m would never write policies for pre-FIRM properties.18 As another example,Evan Hecht,CEO of The Flood Insurance Agency,said in testimony for Congress,“It is also noteworthy that FEMAs most hazardous rated policies,V(ve-locity)zones,have enjoyed the most favorable loss experience of any sub-group,wh
273、ile FEMAs preferred risk policies(PRP)have performed rather poorly”(Hecht 2017).Figure 9.Programs Targeting SFHA or Non-SFHA RisksNote:Totals do not add to 100 percent because we lack information for several firms.0%10%20%30%40%50%60%70%80%90%100%27%Target SFHA or will write all zones Admitted Surpl
274、us LinesTarget non-SFHA or will write all zones57%24%38%The Emerging Private Residential Flood Insurance Market in the United States 27We also heard that many companies were targeting high-end homes,a sector often not well served by the NFIP with its coverage limits.This was not universally true,how
275、ever.Coastal American,for example,targets homes that are a few blocks back from the beach,well built,and not extremely high value.The cofounder of Coastal American was quoted in a newspaper article as saying,“Middle America cannot afford to live on the waters edge”(Festa 2016).At least one interview
276、ee mentioned that NFIP rates do not take into account the value of a home(at least outside the V zone),which can create challenges for the private sector.This person noted that for a given flood zone and elevation,a$1 million home and a$250,000 home pay the same for$250,000 of coverage even though t
277、he high-value home is much more likely to incur a loss of a given value.He called this a fundamental error in NFIP pricing.It also creates a regressive benefit to higher-value property owners that would not occur in the private market.Still other firms are targeting second-home properties,since the
278、2014 legislation requires them to pay a higher NFIP fee.Many companies do not cover risks in communities that do not participate in the NFIP or are otherwise ineligible for NFIP coverage(such as those located in areas protected by the Coastal Barrier Resources Act).However,at least one company has f
279、ound a niche in insuring these properties.A major difference between the NFIP and the private sector is underwriting.The NFIP does not underwrite while the private sector is very choosy.The CEO of HCI group wrote that“private insurers can underwrite to better loss ratios and innovate to better expen
280、se ratios”(Patel 2017).All the company representatives we spoke with engage in some form of aggressive underwriting.Multiple interviewees told us there were certain risks they would not accept into their portfolios.These universally include repetitive loss properties:many companies will not write po
281、licies for any property with a prior flood loss.Some stakeholders expressed concern that private insurance companies may decline to provide coverage after policyholders suffer flood damage,putting those properties back in the NFIP and making private flood unsustainable.The market is still too young
282、for us to ascertain how much of a problem this could be.Figure 10.Limitations on Writing V Zone Risks,by Type of Insurance Company27%58%8%38%14%48%Admitted Surplus Lines V zone limits No explicit V zone limits Unknown V zone limits No explicit V zone limits UnknownResources for the Future28Certain g
283、eographic regions were also deemed“uninsurable”by some firms.The specific regions varied by firm,but the following locations were mentioned by at least one company representative:Fire Island,New York;Monroe County,Florida;Miami,Florida;Norfolk,Virginia;Padre Island,Texas;Sacramento,California;and so
284、uthern Louisiana.One MGA representative noted that offering no coverage in certain risky areas was better than trying to weed out a locations riskiest properties because it was less onerous for agents.Interviewees said that if an insurers underwriting criteria were too selective,an agent might stop
285、using it,even if that insurer provided a great price.Some firms would not write coverage for structures whose first floor was below BFE.Superior Flood will not write properties in the 20-year floodplain unless the structure is sufficiently elevated.Despite statements that the private sector could co
286、mpete in SFHAs,many companies representatives told us that they placed some restrictions on writing in coastal areas:some companies would not write in V zones or on barrier islands,and others excluded beachfront homes or those within a certain distance of tidal water or the ocean.The limitations on
287、V zone risks were predominantly from admitted carriers(Figure 10).Just under 60 percent of admitted carriers had some underwriting restrictions for V zones as opposed to less than 15 percent for E&S firms.Most companies have strategies to manage concentration of exposure.Many are diversifying geogra
288、phically.Multiple interviewees told us,for example,that they limit the number of policies written in a given zip code,county,or neighborhood.Once that limit is reached,the company may decide not to write anything else in that area at any price(see Section 4.2.3).3.6.State AnalysisA comprehensive sta
289、te-by-state analysis is not possible because of data limitations.Only Florida and Texas are systematically collecting data on residential private flood insurance.Companies were extremely reluctant to share data broken out by state.In this section,we provide an overview of what we know from broader d
290、ata and then turn to look at Texas and then Florida.The S&P Global Market Intelligence data,discussed in Section 3.1,covers total flood premiums written by state,for both commercial and residential flood insurance.This is shown in Figure 11,in combination with the NFIP written premium for that state
291、.In 2017,Florida and California had the highest amount of private flood premiums written,with$84 million and$72 million,respectively.However,these totals are still small compared with the NFIP.As of January 2018,NFIP premiums written in Florida stood at$962 million,making private flood almost 9 perc
292、ent of the states flood market,and$190 million in California,where private flood accounts for about 28 percent of the total.The Emerging Private Residential Flood Insurance Market in the United States 29Another source of data that allows for cross-state comparisons comes from the Wholesale&Specialty
293、 Insurance Association(WSIA),which collected data on surplus lines flood policies(commercial and residential)in nine states:California,Florida,Illinois,Mississippi,New York,Pennsylvania,Texas,Utah,and Washington.Of the flood premiums written in these states in 2017,WSIA(2018)estimates that 21.5%of i
294、t was for residential flood.At just under$50 million,this is roughly 1 percent of NFIP premiums.Of the nine states for which WSIA has data,just under 40 percent of the residential E&S flood premiums are in Florida,25 percent are in Texas,and almost 12 percent in California(WSIA 2018).Figure 12 shows
295、 the number of surplus lines flood policies in seven states for 2016 and 2017.All states saw growth in private flood.Florida again has the highest policy count,with Texas and California coming in second and third.Figure 11.Total Commercial and Residential Premiums Written,NFIP versus Private Market$
296、0$200,000,000$400,000,000$600,000,000$800,000,000$1,000,000,000 NFIP(Jan.2018)Private(2017)FloridaVirginiaMassachusettsNorth CarolinaSouth CarolinaNew JerseyNewYorkCaliforniaLouisianaTexasResources for the Future30Figure 12.Surplus Lines Primary Residential Flood Policies for Select StatesSource:Dat
297、a reported by Wholesale&Specialty Insurance Association.Note that these totals may not reflect end of year policy counts.For example,The Surplus Lines Stamping Office of Texas provided updated data showing that Texas had about 13,000 primary residential flood policies at the end of 2016.05,00010,000
298、15,00020,00025,00030,000FloridaTexasCaliforniaPennsylvania 2016 2017IllinoisMississippiWashington4,82324,45317,0714,2657,4113,2055,090627292,084Table 3.Residential and Commercial Premiums for Texas Flood Insurers,20162017CompanyDirect Premiums,2016Direct Premiums,2017GrowthFactory Mutual
299、Insurance Co.$17,689,903$20,390,72015%American Security Insurance Co.$0$5,991,217Affiliated FM Insurance Co.$2,810,453$3,362,49320%Zurich America Insurance Co.$0$2,979,234Westport Insurance Co.$2,406,469$2,630,3339%Liberty Mutual Fire Insurance Co.$0$1,635,547AIG Property Casualty Co.$1,452,158$1,38
300、9,962-4%American Guarantee&Liability Insurance$0$1,286,147Allianz Global Risks US Insurance Co.$1,084363$1,153,7526%Employers Insurance of Wausau$0$714,585Other firms$1,136,768$1,291,42414%Total$26,580,114$42,825,41461%Source:S&P Global Market Intelligence data as provided by the Texas Department of
301、 Insurance.The WSIA data include counts of surplus lines policies for excess flood above the NFIP coverage cap.Looking at Florida,Mississippi,Texas,and California,WSIA found that in 2015,there were 6,620 such policies,jumping to 13,643 in 2016,and then falling back to 10,911 in 2017.The largest numb
302、er every year are in Florida by an order of magnitude with 80%or more of the excess flood policies written in the state.The Emerging Private Residential Flood Insurance Market in the United States 31Even though the residential flood market,like the NFIP market,is geographically concentrated,some for
303、m of residential flood policy is available in almost all states.Private insurers typically do not write policies in Alaska,Hawaii,Louisiana,and Kentucky.19 In all the states with high counts of NFIP policieswith the notable exception of Louisianaresidential flood is available from multiple carriers
304、in both the admitted and non-admitted markets.In Louisiana,there is only one admitted company writing flood,but several MGAs offer surplus lines coverage.3.6.1.TexasTexas has the second-highest number of NFIP policies in force in the country(behind Florida),approximately 676,000 total policies(645,0
305、00 residential)as of the end of February 2018.Perhaps surprisingly,only roughly 30 percent of the covered properties are located in SFHAs(fewer than 10 percent are in coastal A and V zones).This makes it a state with very high numbers of X zone policies.Texas has collected data on both admitted resi
306、dential flood and surplus lines flood policies.20 Texas has diligent search requirements under which consumers must first seek insurance in the admitted market.If they cannot get admitted coverage,only then can they turn to the surplus lines market.Direct written premiums for insurers writing flood
307、in Texas are shown in Table 3.Overall,the state saw 60-plus percent growth in flood premiums between 2016 and 2017.This generally reflects the recent growth in private flood nationwide.Total flood premiums account for a bit over 4 percent of total flood premiums in the state.The Surplus Lines Stampi
308、ng Office of Texas collects data on surplus lines flood policies.As shown in Figure 13,the state saw an over 838%increase in the number of surplus lines flood policies between 2014 and 2017 and over a 260%increase in flood premium over the same time period.This was an increase of 17,788 surplus line
309、s policies and$23,921,000 in premium.For comparison,as of February 2018,there were 676,000 NFIP policies in Texas amounting to about$400 million in premium.So the surplus lines policies,while growing,are still less than 3%of the number of NFIP policies in Texas.The Texas Surplus Lines Stamping Offic
310、e has found these policies tend to be concentrated closer to the coast.19 We were told by an interviewee that the reasons for limited private market in these states vary.This person noted that in Alaska there is not much demand,in Hawaii there is concern over tsunami risk,and in Kentucky there are c
311、omplex rules for E&S compa-nies.20 Admitted data are collected by the Texas Department of Insurance.Surplus lines data are collected by the Surplus Lines Stamping Office of Texas(SLTX),a nonprofit,unin-corporated organization created by the state legislature to“ensure the integrity of the excess and
312、 surplus lines market.”SLTX provides data,analysis,and educational resourc-es on the states surplus lines market.We thank both offices for sharing these data for this report.Resources for the Future32Figure 13.Texas Surplus Lines Residential Flood Policy Growth,20142017Source:Data provided by the Su
313、rplus Lines Stamping Office of Texas02,0004,0006,0008,00010,00012,00014,00016,00018,000201420152016 Primary Excess Total20171,4109063,23613,93817,9813.6.2.FloridaFlorida is the largest flood insurance market in the country and home to roughly 35%of NFIP policies nationwide.There are also more privat
314、e flood carriers active in Florida than in any other state.As of May 2017,at least 14 admitted companies offered primary residential flood insurance in the state,as did nearly every MGA we identified(expect those few with a regional focus that excludes Florida).This grew such that as of July 2018,th
315、ere were 29 companies writing admitted flood in Florida.The state has been active in trying to attract private flood policies through favorable regulations and approaches.The Florida Office of Insurance Regulation shared with us companies unaudited,voluntarily reported flood insurance data from May
316、2017.The data show that the states admitted insurers had 18,514 primary and 5,811 excess private flood insurance policies in force as of that date.These polices were written by nine insurance groups and individual insurers throughout Florida.At least three others(Cincinnati Insurance Group,Tower Hil
317、l Insurance Group,and American Integrity Insurance Company of Florida)were awaiting approval of rates and forms at the time the data were collected.21 Figure 14 provides a breakdown of the number of private primary policies in force by company for May 2017.21 Insurance groups such as AIG Group,ASI G
318、roup,and HCI Group consist of subsidiary insurance companies,some of which may offer private flood insurance.For example,in HCI Group,Homeowners Choice Property&Casualty Insurance Company,and TypTap Insurance Company offer private flood.Individual insurers are single companies that of-fer private fl
319、ood coverage;they are not part of a larger group of companies.For example,South-ern Oak Insurance Company is an individual insurer.The Emerging Private Residential Flood Insurance Market in the United States 33Figure 14.Policies in Force with Floridas Admitted Primary Residential Flood Insurance Wri
320、ters,May 201701,0002,0003,0004,0005,0006,0005,1234,6453,6043,3879834831578745AmericanBankersInsuranceGroupASIGroupHSIGroupAIGFloridaPeninsulaHoldingsGroupUniversalGroup,Inc.ACE/Chubb SouthernOakInsuranceCompanyCentauriSpecialtyInsuranceCompanyFigure 15.Floridas Admitted Primary Policy Counts for Sel
321、ect CompaniesSource:Company data voluntarily reported to the Florida Office of Insurance Regulation;the data have not been audited.05001,0001,5002,0002,5003,0003,5004,0004,5005,000August 2016November 2016 Florida Peninsula Holdings Group HCI Group AIG ASIMay 2017While these numbers are modest in com
322、parison with the states 1.7 million NFIP policies,the market has grown quite rapidly.This is shown for select companies for which data was available for several years in Figure 15.Each company saw yearly growth in policy counts.Such growth continued into 2018.Resources for the Future34Table 4.Policy
323、 Types Offered by Florida Admitted WritersGroup or InsurerEndorsementStand-AloneACE/ChubbAIGAmerican Bankers Insurance GroupMobile homes onlyAmerican Integrity Insurance Company of FloridaASI GroupCentauri Specialty Insurance CompanyFlorida Peninsula Holdings GroupHCI GroupSouthern Oak Insurance Com
324、panyUniversal Group,Inc.There is also a robust E&S flood market in Florida.Data from WSIA(2017)show that the number of primary residential E&S flood policies in Florida grew by 500 percent in a single year,from roughly 4,900 in 2016 to more than 24,400 in 2017.The E&S policies,however,are still less
325、 than 2 percent of all residential flood in Florida;the NFIP remains the overwhelmingly dominant provider.Of 16 E&S products,we found that Lloyds backs 13(more than 80 percent).One was backed by Hiscox,one by Lexington,and one was jointly backed by Lloyds and Liberty.3.7.Market EvolutionAlthough the
326、 nascent residential private flood market in the United States has seen year-over-year growth,it remains small compared with the NFIP.We saw indications of continued expansion,with numerous companies beginning to enter new states or introduce new products.Almost all individuals with whom we spoke be
327、lieved the market will continue to grow but is unlikely to dominate market share over the NFIP in the near-term.The Associate General Counsel from Lloyds America was quoted in a news article as summing up private market growth this way:“We think it will continue to grow strongly over the next few ye
328、ars but we do not see that it will explode and be able to take over the NFIP or replace it anytime in the near future”(Madonna 2017).For certain residential properties and regions,the private market is not going to find it profitable to offer flood coverage at an affordable or attractive price.The N
329、FIP will certainly retain its role for these properties.In 2016 testimony,the Independent Insurance Agents and Brokers of America noted that although it supports private market growth,“the private insurance industry lacks the capability to underwrite flood insurance on a pervasive basis to meet cust
330、omer needs”(Heidrick 2016).Right now,there are more E&S residential flood policies than admitted ones and we heard some comments that E&S firms would maintain the largest share of policies The Emerging Private Residential Flood Insurance Market in the United States 35in the near-term given the natur
331、e of the flood peril.Others we interviewed,however,suggested that as comfort with the modeling,rating,and underwriting increased,the admitted market would grow more substantially.If surplus lines firms devised a functional business model that could be scaled up,some interviewees said,more admitted f
332、irms were likely to enter the market;on the other hand,if losses to these surplus lines firms consistently exceeded model estimates,larger admitted carriers would hold back(Lamparelli and Maddox 2017).Today the large US property and casualty companies have very little presence in the residential flo
333、od market,although some have begun to test the market through subsidiaries.All interviewees agreed that large homeowners insurers would enter the residential flood market slowly and carefully.These firms are concerned about reputation,risk concentration,and regulatory constraints and are taking a wait-and-see approach.Furthermore,we heard repeatedly that demand for residential flood insurance is l