Private Insurers Can Complement National Flood Insurance

A new study says that there are some regions in the country where National Flood Insurance Program (NFIP) premiums are too high.

The report, from the Wharton Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania, says these high premiums in some areas present opportunities for private insurers to provide coverage and complement the NFIP.

The report says the NFIP has brought important benefits to those living in hazard-prone areas over the years. But the program also faces important challenges: For example, it is now $17.8 billion in debt. Also, many residents in flood-prone areas are not insured.

There is a growing consensus that the NFIP needs reforms. The Federal Emergency Management Agency (FEMA), which is responsible for the NFIP, recently proposed several reform options, including privatization of flood insurance.

Many believe that private flood insurance will always be more costly than what the NFIP currently charges. But the Wharton study says that may not be the case.

The study, with catastrophe flood modeling conducted by CoreLogic, analyzed the likelihood of future catastrophic flooding — and the potential cost of providing private flood insurance — in a pilot study focusing on two flood-prone counties in Texas.

The analysis calculated the “actuarially fair” flood insurance premium, based on the probabilistic risk models, for more than 300,000 residences in Galveston and Travis Counties. The Wharton study then compared these rates to the rates currently charged by the NFIP.

The report shows in the regions analyzed there are areas where NFIP premiums, are, on average, too high (and other areas where premiums on average are too low).

“This presents opportunities for private insurers to provide coverage in some of those areas, to complement the NFIP,” said Erwann Michel-Kerjan, Risk Center managing director and study co-author.

“There are several practical barriers that would need to be addressed for private insurers to sell such coverage, but if done, this could significantly increase the number of residents with proper coverage, thus reducing the need for government disaster relief.”