As Hurricane Milton nears landfall and in the wake of Hurricane Helene, the long-term sustainability of the National Flood Insurance Program (NFIP) remains in question, despite Congress recently agreeing to a short-term extension.
According to a new report by AM Best, a permanent solution for the troubled federal program may require private insurers to take on more flood risk, but growth in private flood insurance has slowed.
The report highlights how population shifts to coastal areas have increased the exposure of residential and commercial structures to flooding. This has compounded the challenges faced by the NFIP, which has accumulated nearly $21 billion in debt.
Losses from Hurricane Helene are expected to add to this debt, and further losses from Hurricane Milton could exacerbate the program’s financial burden.
Although the NFIP introduced its Risk Rating 2.0 system to improve pricing and better assess risk for individual properties, affordability issues remain. The NFIP policy count has declined, partially due to the higher costs of federal flood coverage under the new plan.
Private insurers, historically focused on commercial policies, have shown interest in accepting more flood risk, but take-up has been minimal so far.
David Blades, associate director of Industry Research and Analytics at AM Best, noted that as NFIP pricing increases, private insurers may become more competitive in the flood insurance market.
“Whether private insurers have the appetite for additional flood risk remains to be seen,” Blades said.
According to the report, private flood insurers, which account for about one-third of all direct premium written for flood insurance, have produced better financial results than NFIP policyholders.
In 2023, private insurers reported a combined ratio of 32.3 compared to 90.2 for NFIP. Despite this, private market growth stalled in 2023 after years of expansion from 2020 to 2022. In states prone to hurricanes, such as Florida, the share of flood insurance purchased in the private market remains below the national average.
Christopher Graham, senior industry analyst at AM Best, suggested that slow growth in private flood insurance could stem from insurers’ reluctance to increase exposure due to unpredictable weather or from hesitancy among policyholders to switch to private coverage.
“However, without the NFIP, there would be a large void in the flood insurance market – one that private flood insurers do not appear eager to fill at this point,” Graham said.
The NFIP’s current debt stems largely from its inability to fully cover claims from major disasters such as Hurricane Katrina, Superstorm Sandy, and Hurricane Harvey. Despite Congress forgiving $16 billion of NFIP debt in 2018, the program still owes $20.6 billion to the US Treasury. Since 2005, losses have exceeded premiums by $36 billion.
The increase in flood exposure has been driven in part by the construction boom in coastal areas. The original pricing models for the NFIP may have been adequate at the time, but the expansion of residential and commercial properties along the coasts has increased vulnerability to flood events.
Urbanization has also reduced the amount of land that can absorb floodwaters, contributing to more severe flooding than originally anticipated.
Following Hurricane Helene, US Secretary of Homeland Security Alejandro Mayorkas noted that FEMA, which oversees the NFIP, may not have sufficient funds to cover the remainder of the hurricane season.
The program's debt is expected to increase further as it faces additional claims related to storm surge in Florida and inland flooding in states like Georgia, North Carolina, and Tennessee.
Losses from Hurricane Milton could add to the NFIP’s financial challenges, continuing the strain on the federal program’s ability to meet claims and maintain financial stability.
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