Flood risk in the United States of America
The United States of America has experienced a number of high-intensity flood events in recent years. With climate change studies indicating that the occurrence of extreme events is likely to increase, this article looks at the current risks of flooding the US faces, and where the private insurance industry can help with this
Effects of climate change on US weather
A recent study published by the U.S. Global Change Research Program posited that the intensity of the number of extreme weather events we’ve seen in the United States of America over recent years have been increasing due to changes in global temperatures. This has been supported by a number of other studies across the globe, with climate scientists coming to a consensus that there is a correlation between event intensity and climate change.
Given that the average global temperature has increased by about 0.8°C since records began in 1880, with two thirds of this warming occurring in the last 35 years or so, coupled with the steady increase in Hurricane intensity since 1980, it is highly likely that there is a connection between the two. The impact of these events, whether you agree with the correlation between them and climate change or not, has been devastating, particularly since the turn of the 21st century.
Statistics collated by the National Weather Service show that over the last 30 years the US has suffered an average of $8.2bn in flood damages each year, with Aon Benfield stating in their annual weather report that economic losses from flooding in the US for 2018 was $5.5bn, of which insured losses accounted for $3bn.
What’s the US doing to tackle the problem?
Many in the US are calling for further action to be taken by the private and public sectors alike. A number of professionals and scientists have been critical of the quality of the flood data used by the Federal Emergency Management Agency (FEMA). They’ve found that it varies in age and quality, uses rough terrain data, and simplistically represents the physics of how floods spread.
This is highly problematic, particularly given that the National Flood Insurance Program is currently using these maps when issuing policies to homeowners. With the lack of a diverse private insurance market armed with accurate data to price premiums in-line with the current risks to property, the NFIP has to fit the bill when flood events occur.
Therefore, it’s plausible to argue that at this rate, the NFIP is unsustainable in its current state and this situation is likely to worsen in light of modelled outputs predicting more intense storms.
There is however light at the end of the tunnel, and there are solutions to this pressing issue.
Private insurers can help fill the gaps of government programs and ease the financial burdens placed upon them when policy holders claim against high-intensity flood events.
There is already an appetite from insurers to enter this market, with over 21 currently writing policies for flood across the United States of America as of writing this article. By creating a more competitive market, premiums can be adjusted accordingly for high risk properties whilst keeping prices fair for those policyholders who live in low risk areas.
How UK flood data has influenced US insurers
The UK has been highly praised in the CIPR study (in the section entitled ‘Flood Insurance Regimes Around the World’), for bundling flood insurance with other home insurance products which increase profitability for the insurer whilst offering peace of mind for the homeowner, as well as potentially reducing costs overall if other insured risks in the policy are low (i.e. fire, burglary etc.).
The study also advises that if the NFIP worked similarly to the UK’s Flood Re scheme, it would help keep the program financially sustainable whilst supporting the private insurance industry by enabling them to keep premiums competitive for those policyholders in high-risk properties, thereby passing on savings to the homeowner too (for further information on Flood Re, visit this web page).
What do the measures mean for US homeowners?
The US government and the private insurance industry can work together to help those who fall victim to flood events to be more financially able to deal with the consequences. As studies concur, private insurers play a crucial role in supporting recovery efforts. If homeowners were given the security of sustainable pay-outs following an event, although it won’t ease the trauma or recover lost possessions, it would help those who fall victim to an intense flood event find other accommodation and recoup their losses, in-turn easing the burden on government programmes.
There are many other ways that the impact of these events can be mitigated: from using flood data for carefully planning building developments on floodplains (or deciding against building on floodplains all together); accurate forecasting to inform timely early warnings to facilitate evacuation of people; to fitting stronger defences capable of handling these large-scale flood events.
Ambiental Risk Analytics and the US insurance market
Ambiental is currently developing products for the US insurance market to inform their underwriting practices, and help them understand the full view of flood risk across the country. For further information please view this article which outlines what these products are, and what territories will be covered first.