California floods highlight need for “robust private market” - AM Best

As private flood insurance accounts for over 40% of California’s entire flood market—a significantly larger share than in the other leading states—the ongoing flooding issues in the state will present a good test for the private flood insurance market, according to AM Best.

The extreme weather that has bombarded California with deadly rain and winds since late December has left neighborhoods under water, downed trees, and caused mudslides.

This series of storms has been transported by an “atmospheric river,” a relatively narrow, windy region of the Earth’s atmosphere that can transport moisture for miles, like a river on land does water.

Unfortunately for Californians, these storms are battering the state after a decades long drought in both the state and the surrounding region.

Despite the unrelenting rain, the ground is unable to soak up the water because of the prolonged drought and devastating wildfires—hence, the historic flooding and mudslides currently plaguing the state.

With the extreme weather continuing into mid-January, it is too early to begin calculating the cost of damage to homeowners and businesses across the state, but the cost is ultimately expected to be in the billions.

AM Best estimates that 98% of California residents are not insured for direct flood exposures. These storms in California and the ongoing flooding will therefore shine a spotlight on private flood insurance. 

Homes remain underinsured

The rating agency notes that the inadequacy of the National Flood Insurance Program’s (NFIP) rates has been apparent for some time. This points to an opportunity for a robust private flood insurance market.

However, the NFIP’s newly implemented Risk Rating 2.0 increased the potential for more private insurers to provide flood insurance options outside the federal program, and according to the commentary, this seems to have taken hold in California.

Of the states with at least $100m of direct premiums written in flood insurance, California has the largest share of premium written by the private market, at 41%, compared with 24% nationally.

At the same time, just 2% of California residents have purchased flood insurance, and the state’s NFIP policies represent just 4% of the NFIP’s total policies despite the state representing approximately 12% of the US population.

These percentages indicate that the preponderance of the flood losses suffered by homeowners and businesses will not be covered by insurance.

“Homes in California protected by NFIP insurance may still be underinsured, given that NFIP insurance is limited to $250,000 per residence, well below California’s median home value of nearly $685,000, the second-highest in the country,” said Christopher Graham, senior industry analyst, AM Best.

Private market opportunities

“Many homes covered by the NFIP would benefit from an excess policy above the NFIP coverage limit, so opportunities abound for private flood insurers willing to take the risk.”

Historically, private flood insurance has been profitable for California’s top private flood writers, but the extensive damage from the current storms may be enough to wipe out several years of good results.

However, the commentary also notes the regulator’s directive to insurers stating that mudslides, which are typically covered by flood insurance, are to be covered under a homeowners or other property policy as a fire loss if the hill in which the mudslide emanated was previously weakened by fire.

Although the total economic loss would be unaffected, the decree may shift some losses from flood policies to other property policies.