staging your state for private flood · flood insurance by the numbers floods are now expected to...
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NAIC 2019 SUMMER NATIONAL MEETINGAUGUST 03, 2019
Nancy Watkins, FCAS, MAAAPrincipal & Consulting Actuary
NAIC Catastrophe Insurance Working Group
Staging your state for private flood
Flood insurance is more crucial than everThree rainiest storms in the past 70 years have occurred since 2016
“A top rainfall meteorologist calculates that Hurricane Florence is the nation’s second rainiest storm in 70 years.”
“…only Hurricane Harvey last year rained more over a 14,000 square mile area than Florence during a four-day period.”
“The third rainiest storm was in March 2016 in northern Louisiana.”
Source: “Hurricane Florence is nation’s second wettest storm, behind Harvey,” San Francisco Chronicle, September 27, 2018
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Too many consumers have flood losses but not insuranceBetween 50% and 80% of wind and flood losses in recent catastrophes went uninsured
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60%
70%
50%
58%
77%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
20
40
60
80
100
120
140
Hurricane Matthew(Oct 2016)
Hurricane Harvey(Aug 2017)
Hurricane Irma(Sep 2017)
Hurricane Maria(Sep 2017)
Hurricane Florence(Sep 2018)
Hurricane Michael(October 2018)
% U
nins
ured
Ove
rall
Estim
ated
Cos
ts ($
Bill
ions
)
Overall Estimated Costs (Billions)
Source: www.Artemis.bm, www.reinsurancene.ws, Milliman Insight,NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2019). www.ncdc.noaa.gov/billions/
Flood insurance by the numbers
Floods are now expected to cost U.S. households $20 billion each year, with only 16% of these losses insured by the NFIP
NFIP insures 4.8 million residential policies (including 3.5 million single-family homes), with total premium of $3.6 billion including federal policy fees
There are 82 million single family homes in the U.S. Only 15% of U.S. homeowners had a flood insurance policy in 2018 Estimated 2018 direct written premium for residential flood market by private insurers is $213 million,
slightly reduced from 2017 estimated DWP of $220 million Milliman estimates the potential private residential flood market to represent between $34 billion and $48
billion of DWP
Sources: Congressional Budget Office, FEMA, US Census American Community Survey, Insurance Information Institute, FEMA, Insurance Journal, Millimanestimates
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Milliman research and analysis Encouraging a private flood market
Interviewed regulators in key states to discuss approach to regulating private flood Researched public sources on property insurance regulation and practices Reviewed private flood insurance rate, rule and form filings Prepared 50-state matrix on flood regulation for National Association of REALTORS® Market studies and publications on impact of private flood insurance: Wading into private flood: Considerations for new insurers
Four ways Hurricane Florence could ricochet across the insurance industry
What could private flood insurance look like in New Jersey and New York?
Could private flood insurance be cheaper than the NFIP?
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What is the NAIC’s vision for the future of flood insurance?
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Larger variety of options for consumers: Private and public (NFIP)
Admitted and nonadmitted
First dollar with specified limits, first dollar up to full home value, and excess of NFIP
Standalone flood and endorsement to homeowners policy
NFIP equivalent policy coverage and broader coverage options
Agents and insurers actively competing to provide coverage Innovations in technology to reduce cost and streamline user experience Affordable risk-based premiums for the greatest number of households Higher participation / take-up rates across all flood zones Reduced reliance on disaster assistance and faster rebound post-event
Some possible suggestions…
Obstacles for insurers considering flood Flood risk varies significantly over a
short distance, so pricing and underwriting are typically hyper-localized Most companies lack data and
experience writing / servicing flood policies Catastrophic potential and interaction
with wind perils creates reinsurance challenges High potential for a small number of
risks to drive losses7Image Source: Hurricane Harvey Water Extent (Estimated)
UC Davis Center for Watershed Sciences
How do you make your state attractive to more insurers?
Most states do not have laws specific to private flood Regulators often have no official positions on which existing regulations apply to flood Some regulators are being flexible on current guidelines to jump-start the flood market, but future
guidelines are unknown Insurers may perceive regulatory requirements as manageable for mature homeowners insurance
products, but not for more risky emerging flood products
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Rates must be based on historical experience or the approved rates of a competitor
(Florida) Flood rates can be based on CAT models, to be reviewed starting in 2019
Staging tip #1: Use of catastrophe models Private flood insurance is generally priced and/or underwritten using
catastrophe (CAT) models.
0%10%20%30%40%50%60%70%80%90%
100%
Percentage by state of cumulative NFIP paid loss since 1980
LA TX NJ NY FL Other
Historical data is too volatile for flood ratemaking
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Source: OpenFEMA data June 2019
Katrina:LA 12% to 49%
Sandy:NJ 4% to 12%NY 3% to 11%
Harvey:TX 12% to 23%
Current NFIP rates are based on first generation models
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Next generation flood CAT models are now available
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Paths of hurricanes from 1851 through 2015 (NOAA)
Storm surge models have been available for many years Availability of new inland
flood models opened up the market for private flood FEMA is augmenting
NFIP data with CAT models to revamp NFIP rates
Relying on historical flood experience vs. CAT models
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Reflects only events that actually occurred; in U.S. only NFIP has a significant amount of data which is not available by location Choice of years to include can result in
materially different outcomes Reflects historical homes insured (location,
home materials, building codes) Difficult to adjust data in a meaningful way
to show effects of mitigation Difficult to adjust data in a meaningful way
to show effects of climate change
Experience CAT models
Reflect the range of possible events and their likelihood; typically based on hazard, engineering, and financial models calibrated to reproduce historical events Not sensitive to choice of years Reflect current or prospective homes
insured as inputs to model Can be built to show change in outcomes
under mitigation scenarios Can be built to show change in outcomes
under climate change scenarios
Catastrophe model treatment varies widely among states
Florida – only state with government body explicitly tasked with scientific and technical review of hurricane models (flood initiated in 2017) A few states explicitly piggyback on Florida via regulation or bulletin Case-by-case model validation is the rule in most states Model description, version number, major “switches”/settings, list of inputs and outputs
Questionnaires to be filed with any filing that uses models underlying rates
Generally ensure confidentiality while disclosing model details
Some states explicitly prohibit the use of CAT models in establishing ratesOthers allow for certain lines of business, perils or purposes
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Catastrophe model challenges Challenges for state regulators: Balancing need to address underserved market against need to protect consumers
Lack of appropriate expertise and/or resources to review models comprehensively
Inability to protect proprietary information of modelers and insurers
Challenges for insurers and catastrophe modelers: Inefficiency of responding to requests on state-by-state basis
Concerns over intellectual property exposure
Uncertainty over model acceptance for various uses
Results: Hesitation of insurers to invest in challenging markets where cat models are prohibited, or where uncertainty/cost of
regulatory review is perceived to be too high
Fewer options for consumers who want affordable and available flood insurance
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Proposal for catastrophe model clearinghouse Voluntary participation by states who wish to rely on expert model reviewMulti-disciplinary panel to develop model standards, disclosures, and review
requirements Process to select third-party experts to perform confidential reviews under
guidance of panel Searchable database of Publicly available modeler disclosures
Confidential modeler disclosures
Third-party reports reviewing model compliance with standards
Results of model acceptability for rating and/or underwriting
Many details would need to be worked out (funding, market acceptance, trade secret protection, etc.) for the proposal to work
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All rates, rules, forms, and underwriting guidelines must be filed and justified by companies, and approved by regulators
(New Jersey) Flood rates, rules, and forms are expected to be filed (initial and rate changes), but no support required
Tip #2: Rate and form approval
New entrants to flood insurance market are likely to purchase significant amounts of reinsurance As flood insurance is inherently high-risk and volatile, insurers may require
higher amounts of profit & contingencies built into rates than for homeowners
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Tip #3: Reinsurance costs / risk and profit provisions
Cost of reinsurance cannot be reflected in setting prices
(Wisconsin) No limitations or requirements for reinsurance cost and profit provision assumptions
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Tip #4: Confidentiality and trade secret protection
Confidential submissions not allowed All rate/rule pages must be filed and
published for public view
(Pennsylvania) Information deemed confidential, trade secret, or proprietary by the insurer or filer will not be open to public inspection
Commercial CAT modelers can be very protective of their intellectual property, and have certain information they do not want to file publicly Insurers may want to protect their proprietary flood pricing and underwriting
algorithms from competitors
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Tip #5: Cancellation, non-renewal, and market exit
Insurers may not cancel or fail to renew any policy in effect for more than 3 years, or due solely to “act of God” claims Market exits require 150 days notice to the
commissioner
(Mississippi) A cancellation, reduction in coverage, or nonrenewal requires 30 days notice. 60 days notice must be provided to the Commissioner for market exit
Repetitive loss properties make up only 1% of NFIP policies, yet they account for more than 25% of the claims (Source: Pew Charitable Trusts)
Companies may hesitate to enter a risky market if re-underwriting and withdrawal are difficult
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How can we help you?
Individual discussions regarding state-specific flood regulatory issuesMarket research on private flood insurance Process / questionnaire design for review of
flood rates and catastrophe models Filling in gaps with respect to catastrophe
model clearinghouse proposal Understanding changes in NFIP Anything else?
