S&P: Private Flood Insurance Products to Trickle In Slowly

Opening U.S. flood insurance to private insurers won’t lead to a surge of new market entrants, Standard & Poor’s asserts in a new report.

Even if Congress passes legislation to make the change as it is widely expected to do, insurers have a number of obstacles to overcome first, the ratings agency said.

“They’ll need to surmount several difficulties in underwriting, modeling and pricing flood risk,” S&P said. “At this point, we don’t expect a wave of private insurers to sweep into this market but rather a trickle, as insurers would enter cautiously before they become more comfortable with the risks involved.”

Right now, the National Flood Insurance Program handles the bulk of flood insurance in the U.S.; it is a federal government option created to make flood insurance affordable in flood-prone areas. At the end of April, House members passed the Flood Insurance Market Parity and Modernization Act (H.R. 20901) unanimously, a measure designed to open the market to additional private insurers and give consumers more choices. The U.S. Senate is expected to consider the bill.

A.M. Best has said “there are benefits to be gained from a legitimate expansion of the current flood insurance market” that enables private insurers to join in.

Standard & Poor’s notes that the NFIP is dealing with steep losses due to claims severity from previous floods, and points out that ongoing reforms to the program could encourage private insurers to join. S&P is more neutral, however, as to whether that would be a good thing.

“Although a few insurers have experience in flood insurance, many will have to improve their claims handling capabilities if they want to provide flood insurance in a significant way,” S&P noted. “As of now, we believe a slight increase in flood exposure wouldn’t significantly affect our financial strength rating on a given company.”

All bets are off, however, if private insurers were to make an aggressive grab. “If private insurers were to enter … aggressively without proper underwriting guidelines, models, and risk tolerances/limits in place, we could take some rating action on the insurers,” S&P said.