Regular floods, whether due to hurricanes or simply heavy rainfall, are wreaking havoc in the southern states of the US and national flood-insurance schemes can’t keep up. Now Florida is providing a test case for the development of a private residential flood-insurance market
Insurers, climate scientists and catastrophe risk modellers had their eyes on the US state of Louisiana in the summer of 2016, where more than 7 trillion gallons of rain fell in little more than a week.
The flooding that followed was the worst natural disaster to hit the US since Hurricane Sandy in 2012, costing at least a dozen lives and damaging more than 110,000 homes. Only a fraction of those houses were insured against flood damage.
Safety is only relative
Residents in neighbouring Florida – where there’s no such thing as a flood-free zone – knew they could not relax either. And they were proven right when Hermine became the first hurricane to make landfall in Florida since Wilma in 2005. Recently they were hit again when Hurricane Matthew pounded the coastline.
Florida is vulnerable to extreme weather every day of the year. Even those who live inland, well away from the ocean – and who might assume they run a very low to zero risk of storm surge following a hurricane – aren’t immune to the impact of high rainfall.
“Climate change means that Florida’s citizens have increasingly to worry about the risk of flood”
“Florida’s homeowners may have let down their guard somewhat with such a long gap between hurricanes, but flooding really is an omnipresent risk for them,” says Nancy Watkins, a San Francisco-based principal at Milliman, an independent actuarial service provider.
A flood could be caused by anything from torrential rainfall like that seen in Louisiana, to leaves blocking a storm drain, to a sewer pipe breaking near your house. Some of these events won’t be covered by a traditional homeowner’s insurance policy. They won’t all be covered by the US government’s regular National Flood Insurance Program (NFIP) unless the flood involves at least two acres of land and two separate properties. Moreover, NFIP policies cover damage to a total of $250,000 (£190,000): for many homeowners such coverage has long been inadequate.
From Canada’s Hailstorm Alley to the typhoons of the Pacific, there are some places where property insurance will always be tough
It is impossible to immunise yourself completely from weather-related disasters, especially in an era when extreme weather events are occurring with unprecedented frequency and ferocity. That said, there are some corners of the world with a record for particular kinds of weather-related risks and here are some of the worst.
Tornado Alley, Oklahoma
Running roughly along the Interstate-44 highway connecting Oklahoma City and Tulsa, this is ground zero for a large proportion of the 1,200 or so tornadoes that the US experiences annually. On a single day in May 1999, no fewer than 70 twisters hit Oklahoma City and its environs, destroying 1,700 homes and damaging thousands more. Lloyd’s, the London’s insurance market, pegged the value of insurance losses at $400m.
Hurricane capital, Grand Cayman
The Caribbean finance centre is buffeted or hit squarely by a hurricane once every 2.16 years, more than any other Atlantic locale. The island’s residents still shudder at the memory of Hurricane Ivan, a storm that destroyed 70 per cent of its buildings. Cayman’s insurer faced losses estimated at $108m, but wasn’t able to meet the full amount owed.
Ice storms in Canada
Major ice storms pummel the area around Montreal, Quebec City and Ontario every few years; the city of Toronto lost power in 2013 (costing insurers Can$200m) and again in 2015. One of the worst was the ice storm of 1998, when dozens of people died in both Canada and the US, wiping out power lines and costing the Canadian insurance industry Can$1.4bn.
A new report from Climate Central found that California has an average of three more large wildfires each year than it did during the 1970s. Two of last year’s most destructive fires alone cost insurers $1bn and some, like Allstate, have stopped writing homeowner policies for the 2m households considered most at risk.
Deadly typhoon storms wreak havoc from Bangladesh and Myanmar all the way to China and Japan. It is in the last that insurers take the biggest hit, according to catastrophe modellers, since Japan gets a total of 26.7 typhoons annually. Here some of the most powerful storms collide with high-value insured infrastructure.
Canada’s Hailstorm Alley
A part of Canada’s western province of Alberta – that ranges from near the US border, through the country’s oil production capital of Calgary and to the Rocky Mountains – has earned the unwelcome nickname of “Hailstorm Alley”. It is thanks in part to a 2010 storm that pounded Calgary with hailstones 4cm in diameter. In August 2014, southern Alberta recorded the country’s most expensive hailstorm with Can$450m in insurance claims. The frequency and severity of such hailstorms is increasing.
Climate change again the catalyst
Even as homeowners pay ever-higher premiums for NFIP protection, climate change means that Florida’s citizens have increasingly to worry about the risk of flood. The low-lying state is seen as ground zero for climate change risk – higher sea levels, more intense rainfall and stronger hurricanes.
One organisation, Climate Central, a nonprofit news organisation focused on climate science, suggests there’s a 15 per cent chance that a flood in South Florida could reach more than four feet above the current high-tide mark by 2050.
“A flood in South Florida could reach more than four feet above the current high-tide mark by 2050”
There is a lot at stake: Florida has been growing so rapidly that it recently became the third most populous state in the US, overtaking New York, while Miami is one of the country’s wealthiest cities. AIR Worldwide, a catastrophe risk modelling firm, estimates there is $2.9 trillion of insured property at risk in the state.
Hurricane Hermine will have heightened awareness of the need for flood insurance in Florida, just as the state is in the early stages of transforming the market for the product. Thanks to a series of developments that might have been unthinkable only a few years ago, Florida’s state legislature, the US Congress and the insurance industry are making the state a test case for the development of a private residential flood-insurance market.
Individual homeowners and even real-estate agents who think only of NFIP policies have been slow to take note. Since 2014, however, Florida has encouraged private insurers to compete against the NFIP, something that new developments in risk modelling is making easier with every month that passes. “The tools that I would have needed to price risk properly didn’t even exist a few years ago,” says Matt Chamberlain, a principal at Milliman.
That’s because teams at firms such as Risk Management Solutions (RMS) are still rolling out new models that will allow insurers to map the risk of flooding on a remarkably granular scale. Once, the NFIP might have evaluated this at a state, city or county level, and looked at a home’s proximity to the ocean, for instance. New models will be so precise that they will establish different risk levels for one property relative to the one next door, based on its topography.
“New models will be so precise that they will establish different risk levels for one property relative to the one next door, based on its topography”
“Analysing the Mississippi’s flood basin is undertaking a task that is geographically larger than analysing many countries in Europe, and you have to do it with a very high level of precision, understanding just how the water will get into the river system,” explains Matthew Nielsen, global head of regulatory affairs at RMS. “Even if a house isn’t in a designated flood system, one or two feet of difference in elevation may make all the difference in terms of its risk – and its outcome.”
Stagnation in the Senate
A number of catastrophe risk modelling firms like RMS are racing to complete the intensive process of capturing and verifying all this data and building models on which insurers developing products for the still embryonic Florida market can rely.
The advent of these new models, says Milliman’s Ms Watkins, means private insurers will be able to offer a wider range of products with more confidence. And a number of players are testing new products.
For now, it’s the real-estate industry that is watching developments in this area most closely. Some argue that the solution doesn’t lie only in insurance, but in new and better design that drives down the flood risk overall.
“Some argue that the solution doesn’t lie only in insurance, but in new and better design that drives down the flood risk overall”
“Communities are doing more to identify infrastructure projects that can mitigate flooding issues,” says David Martin, president of Terra Group, a Miami-based real-estate development firm. “Some areas are investing in storm management systems upgrades, for instance; then there is the Arch Creek Basin, where the county is moving an entire community in a flood-prone area to affordable housing in surrounding neighbourhoods.” Mr Martin points to Rotterdam’s Water Square, an innovative design that combines urban leisure space with water storage areas to cope with rainwater when it threatens the low-lying delta city. He see it as an example of the kind of venture that Florida could emulate, and that could dramatically reshape the risk maps that RMS and other catastrophe modellers are busily drawing up now.
But the need for flood insurance won’t go away. With a bill that would open up private flood-insurance options nationwide stuck in the US Senate – in spite of having been passed unanimously by members of Congress in May – as the 2016 hurricane season draws to a close, all eyes will turn back to Florida and its tentative foray into this area.
This content was produced by FT², the advertising department of the Financial Times, in collaboration with Milliman.