Moody’s warns US flood protection gap could top $1trn

US residential flood exposure poses a growing credit risk to state and local governments, with aggregated uninsured losses potentially rising from $375bn to more than $1trn under more severe flood scenarios, according to Moody’s.

The ratings agency said its nationwide analysis highlights a structural mismatch between expanding flood hazard and limited insurance take-up, with recovery costs increasingly shifted to households, local authorities and federal relief mechanisms.

“Flood risk is a growing credit challenge for US state and local governments, given increased frequency and severity of flooding events, residential development in flood zones, and limited insurance coverage,” Moody’s said.

The white paper, based on Moody’s RMS US Inland Flood HD model, assesses uninsured residential flood losses at county level across three scenarios: a 1-in-100-year flood, a rarer 1-in-500-year event and a 1-in-100-year flood under an intermediate-emissions scenario by 2050.

“All scenarios assume insurance coverage remains static with no additional investment in flood defenses, indicating current structural exposure rather than a forecast of realized losses,” Moody’s said.

In a modelled 1-in-100-year flood scenario, total uninsured residential potential loss exposure could exceed $375 bn nationwide, Moody’s warned, with a protection gap of more than 65%.

Moody’s stressed that this does not represent a single nationwide flood event, but an aggregated probabilistic view of risk across counties.

“This report highlights a structural mismatch between the broadening of US flood risk exposure and insurance protection,” the cat modeller said.

“Uninsured losses arise not from isolated outliers, but from persistent gaps between expanding flood hazards, particularly beyond regulatory flood maps that dictate mortgage requirements, as well as rarer, high-severity events, and insurance take-up.”

Risk spreading inland

The largest potential uninsured losses remain concentrated in coastal and Gulf states.

Counties with potential uninsured losses above $5bn are clustered in Florida, Louisiana, South Carolina and Texas under the 1-in-100-year scenario.

However, Moody’s said flood risk is becoming more geographically dispersed as event severity increases.

“As the flood footprint expands in rarer 1-in-500-year events, nationwide uninsured loss exposure could triple to over $1 trillion, with a more than 70% protection gap,” the report said.

“Counties with potential uninsured losses above $5 billion extend to 11 states beyond the Gulf and Atlantic coasts, including some with low exposure to physical climate risk.”

The report continued: “As rivers exceed their primary channels, secondary floodplains activate, and pluvial flooding spreads into neighborhoods that rarely flood under moderate conditions.”

“As a result, the flooding footprint expands to states with low physical climate risk exposure, such as Pennsylvania and Illinois.”

Moody’s said 90% of US counties are exposed to some level of flood risk and generally have high insurance protection gaps, although most face relatively modest potential uninsured losses of $150m or less per county.

The credit impact, it added, will depend not only on the percentage size of the protection gap, but also on the absolute scale of losses and the ability of local governments to absorb shocks.

“High insurance protection gaps in percentage terms can signal pockets of high risk exposure, but it is ultimately the magnitude of such uninsured losses and a county’s ability to absorb such shocks through federal disaster aid, state and local resources, liquidity and revenue, insured loss proceeds, and the strength of governance frameworks, that will determine credit impact,” Moody’s added.

Beyond FEMA maps

The white paper identified federal flood mapping as a major contributor to the protection gap.

“A large factor in the high flood insurance protection gap nationally is the map that federally regulated or backed mortgage underwriters use as the authoritative source to determine whether a property with a mortgage needs to carry flood insurance, the 1-in-100-year FEMA Specific Flood Hazard Area,” it said.

“But FEMA SFHA maps are primarily based on riverine flooding, omitting increasing flood risk from extreme precipitation, greater storm surges and sea-level rise.”

The National Flood Insurance Program (NFIP) remains the main source of US residential flood cover.

Moody’s said private flood policies have roughly doubled since 2020, but the national protection gap has not materially narrowed because private policies still account for only around 10% of total policies in force, while NFIP policies have declined by a similar number.

The report also pointed to Hurricane Helene’s impact in Asheville and Buncombe County, North Carolina, as evidence of the limitations of relying on historical flood assumptions.

“Rainfall during Hurricane Helene, a Category 4 storm that made landfall in September 2024, exceeded the 1-in-1,000-year rainfall return period, placing it in the extreme tail of historical expectations,” Moody’s said.

“This divergence highlights the risks and limitations of relying solely on backward-looking statistics to characterize flood risk in a changing hydroclimate.”

Under an intermediate-emissions scenario, Moody’s said uninsured flood losses could rise by around 25% by 2050, to about $472bn, assuming static insurance take-up and no additional flood defences.

“As extreme precipitation risk expands the flood footprint, the number of exposed households will rise and so will their level of potential uninsured losses, absent a mitigating uptake in insurance or investment in flood protection strategies,” Moody’s added.