Privatization of the National Flood Insurance Program (NFIP) would present a huge growth opportunity to the property/casualty market, allowing insurers to tap into about $3.3 billion of yearly premiums. But the flood insurance market has a long way to go before it becomes viable for profit-driven carriers and investors, says Deloitte in its newest white paper.

despite the opportunities flood insurance presents, most insurers will likely pass on taking a piece of the risk unless the obstacles that undermined the NFIP’s solvency and put it $30 billion in debt are dealt with first.

Among those obstacles:

  • FEMA estimates that 20 percent of insured property owners pay subsidized premiums, and many of those properties are in high-risk areas. Underpricing of flood insurance to make coverage affordable might actually be encouraging construction in high-hazard areas.
  • Repetitive loss properties account for a large share of all flood insurance exposures.
  • Convincing property owners to purchase flood insurance remains a challenge. Indeed, only 18 percent of properties in flood zones are believed to have coverage.
  • Many homeowners believe recently updated flood maps may be overstating their flood risks.
  • Property owners with lower flood exposure often pass on the coverage, while those in flood-prone areas may assume that federal disaster assistance will help them if a major flood event occurs.

some solutions:

  • Private carriers could write a certain level of primary coverage while reinsuring catastrophic levels with the federal government.
  • The NFIP could purchase reinsurance from the private sector, spreading the risk and limiting exposure in high-catastrophe years.
  • The capital markets could help spread risks through the sale of catastrophe bonds.
  • Private insurers could combine their resources and diversify risk through a flood insurance pool.
  • Private insurers could pick up more moderate flood risks, leaving the NFIP in place as the insurer of last resort.

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