Commercial Risk Management:

Growing Flood Protection Gap and Carrier Capacity 

Wildfires, hurricanes, snowstorms, earthquakes, and tornadoes – there’s no shortage of natural disasters, all of which leave devastation and destruction in their wake. But of all the weather events, did you know that floods are the most common and costly natural peril in the United States? When we consider the following, it’s easy to see why: 

• 90% of all natural disasters in the United States involve flooding 
• 99% of U.S. counties were impacted by a flooding event from 1996 to 2019  
• From 2000 through 2021, on average, at least one flooding event occurred in the U.S. on 300 days per year 

Though we hear about headline-grabbing floods from large-scale events that occurred in late 2022, like Hurricane Ian, the historic floods that swept through Kentucky, or the atmospheric river storms that ran through California, the reality is that flooding is a persistent, year-round event in the U.S and globally. Besides tropical storms, common causes of flooding include heavy rain, overflowing rivers, mudslides, and fast melting snow.  

With floods often inundating businesses, damaging infrastructure, and burdening local economies, it’s clear that flooding is a serious natural disaster risk. Yet despite this reality, there’s a huge gap in insured versus uninsured flood losses both domestically and abroad. Here’s an overview of what that protection gap entails in dollars. 

Flood protection gap, by the numbers 

• Last year, global economic losses from floods amounted to $82 billion, yet insured losses stood at slightly more than $20 billion, indicating a large protection gap.  
• In the U.S. alone, floods accounted for $28 billion in total losses from 2018 through 2023, which doesn’t include flooding losses related to hurricanes.  
• Despite the prevalence of floods, less than 5% of small to mid-size business owners in the U.S. have flood insurance.  
• With the help of climate modeling, an analysis from First Street Foundation found that 30 years from now, losses from floods will increase by about 67%. 

Mind the gap – causes of the growing flood risk protection gap  

Several factors are to blame for the low uptake of flood insurance: 

1. Business owners may think that their commercial property insurance covers flooding, when in reality, flooding is usually an excluded natural peril for this coverage.  
2. There may be a misconception that the business is at a lower risk for flooding than it is.  
3. Many industry experts also blame the Federal Emergency Management Agency’s (FEMA) new flood rating system, Risk Rating 2.0, for decreasing the adoption of flood insurance. Risk Rating 2.0 is a pricing calculation restructure meant to have insurance pricing more accurately reflect each property’s flood risk by factoring in climate change’s impact on different regions’ propensity for flooding. Given that the NFIP currently has $20.5 billion in debt, FEMA also hoped that the new pricing structure could translate to improved financial performance for the NFIP.  

The vast majority of business owners who do purchase flood coverage get it through the National Flood Insurance Program (NFIP), which is administered by FEMA. 

Unfortunately, Risk Rating 2.0 has led to pricing increases for many policyholders. With inflationary pressures and the threat of recession, more companies are struggling to meet growing operational expenses. Forgoing flood insurance might seem like a viable compromise given the circumstances. NFIP data indicates a 4% drop in policies from September 2021 to September 2022.  

The NFIP also has a standard limit of $500,000 for commercial flood policies. If the flooding from a natural disaster is great enough, it’s easy to see how this limit could lead to a coverage gap for your business. In the face of growing flood risk due to extreme weather events and increasing rebuilding and repair costs due to supply chain issues, labor costs, and inflation, underestimating this natural hazard can be a very costly mistake.  

Though more private carriers are beginning to sell flood insurance, there’s still a discrepancy between coverage options and the risk at hand. To better understand the flood risk your business faces, your coverage options, and appropriate loss control measures, connect with one of our Commercial Risk experts today. 

With all the financial and public pressures that the NFIP currently faces, the hope is that more private carriers will begin to offer flood insurance and increase marketplace capacity for this loss. Since flooding is such an unpredictable risk, private carriers have avoided underwriting it because they didn’t have reliable ways to measure it.   

In an attempt to decrease the pressure that rests on the NFIP, FEMA and state legislatures across the country are pushing for private insurers to get involved. Thankfully, private carriers have become more comfortable with writing flood policies due to the advent of technology, improved data, and sophisticated modeling. Many new products have become available for this peril in recent years, which could potentially improve the availability and affordability of flood coverage.  

Yet improving modeling and increasing market capacity is only part of the solution. Public policy, technology, and finance need to work in tandem with communities and businesses to reduce the likelihood of claims and close the coverage gap.

Carriers and insurance advisors should educate policyholders about risk mitigation, resiliency planning, and recovery strategies for flooding disasters. 

If you don’t have flood insurance and want to purchase it to financially protect your business, it’s important to look at all available options before disaster strikes. You’ll also want to be aware of any binding restrictions for securing coverage. Some carriers might implement binding restrictions on coverage if a natural disaster is scheduled to hit an area.

[binding restriction] when an insurance company temporarily stops writing new policies or increasing limits in existing policies.

Flood insurance also tends to come with a waiting period before you’re covered. Like with binding restrictions, this time period varies by carrier. 

Flooding can lead to thousands of dollars in repairs that you might end up having to pay for yourself if you don’t have the proper insurance in place. Determining the necessary amount of coverage requires careful consideration. Given the unprecedented historical events we’ve seen unfold in recent years, now more than ever before is the time to work with an experienced and trustworthy Advisor who can help you adequately determine coverage limits and create a risk mitigation strategy for the entirety of your business.