Insuring flood?
Learn about Munich Re US' unique solutions to address the world’s costliest peril

Tim Brockett:

Hello, I'm Tim Brockett, Head of Specialty for Munich Re US, and I have the pleasure of guest hosting this episode of Nothing Assumed.

Well, we're into the spring season, and like most springs, there's been plenty of rain across the US so far this year. So there's no time like the present to talk about flood risk. And my guests today are our resident experts on the peril of flood, Serena Garrahan, our Inland Flood Product Manager and Alyssa Johnson, our Climate Resilience Solution Manager. Our discussion today will focus on the challenges with the underwriting and managing of flood risk and our solutions that Munich Re US has developed to help insurers combat these challenges.

Serena Garrahan:

Thanks, Tim. I'm happy to be here.

Alyssa Johnson:

Thanks, Tim. I'm glad I could join you both.

Tim Brockett:

Let's start with you Serena. Can you tell me why flood risk continues to be such a concern for insurers today?

Serena Garrahan:

Sure, Tim. Looking at the news, it seems like flooding is always in the news lately. 2024 has already been pretty busy with flood. We've had significant flooding events in California back in January. Just last week the storm system that moved through Oklahoma and Texas not only caused a number of tornadoes, but it also produced excessive rain that caused flooding as well. Even here in New Jersey, we've had some heavy rainfall this year that has led to flooding. So it's really not surprising that flood is a topic on everyone's mind these days. And it really isn't just a recent issue. At Munich Re, we estimate that there have been 118 flood events from 2019 to 2023, which have caused almost $48 billion in economic losses and $13 billion in insured losses. And while flooding is a worldwide peril, six of the most expensive weather related disasters in the world, happened in the US. Looking back to 2017, hurricanes Harvey, Irma and Maria caused a combined $224 billion in economic damages.

And Harvey is a prime example that flooding doesn't just happen in high risk areas. About 80% of losses from Harvey occurred outside of the special flood hazard area. And we can expect that this trend will continue. So as our climate continues to change, for every one degree Celsius increase in air temperature, the atmosphere can hold 7% more moisture, leading to more frequent heavy rainfall events. The risk isn't only on the climate side, though. Population density is increasing exposures, we have more targets on the ground for insurers to be worried about, we have people moving to hurricane prone areas. So with all of this taken into account, it really makes flood a significant concern, not only for homeowners but for insurers as well.

Tim Brockett:

I would echo those comments and put out some additional stats. There's a study that the First Street Foundation did a couple of years ago that indicated that 14.6 million properties are at significant risk of flooding. So that's 70% more than what's currently indicated by FEMA's special flood hazard areas. Then there's also a NOAA report that says moderate flooding will be 10 times more likely by the year 2050 due to sea level rise. So needless to say, flooding is a risk on the rise. So then maybe you can talk a little bit from here, Serena, about the challenges insurers are facing in providing flood coverage.

Serena Garrahan:

Sure. Flood is a highly granular peril, and in order for us to accurately price that risk, we really need to have a clear picture of the property that we're insuring. Even really small differences in elevation can mean the difference between a property having a loss or not having a loss during a flood event. And really up until recently, we didn't have a lot of data or modeling capabilities to accurately assess and price that risk. I think it's also important that we look at the NFIP. The NFIP was set up in 1968 after insurers left the flood market, but there are also some issues within offering flood coverage through the NFIP. For many years, the NFIP was the sole option for homeowners to purchase flood insurance, but as you mentioned, maybe some maps are outdated and didn't accurately reflect the risk that homeowners had.

There was also a lack of information to accurately price that risk. The NFIP has also been plagued with repetitive loss properties, so we're seeing a lot of the same locations flood year after year, which has affected the NFIP's amount of debt that they have. Administering flood policies as a separate policy is also a hurdle that the NFIP faces. And lastly, the NFIP policies can be a bit cost prohibitive. So even for homeowners that maybe live outside of special flood hazard areas, their premium could still be upwards of $600. With all of that said, the NFIP did implement risk rating 2.0 in 2023, and that really sought to address a lot of the risk appropriate pricing issues and to promote actuarially sound rates. Passage of the bigger Waters Flood Act in 2017 has also really helped to promote the growth of the private market by allowing lenders to accept private flood options. Since then, we've seen that growth with 11 new private carriers entering the market between 2021 and 2022. And private insurers now account for 32% of the overall flood market, which is up from 13% in 2016.

Tim Brockett:

Thanks for that. So absolutely a difficult peril to insure, for sure. Perceptions that homeowners have about flood risk is also contributing to this protection gap that exists. In the protection gap defined as economic losses minus insured losses. So what do we know about what homeowners have to say or what they think about flood risk as it exists today?

Serena Garrahan:

I think education is really the key point here when we talk about flood insurance. There's a lot of uncertainty from homeowners when it comes to flood risk. Generally, I think people aren't always the best estimators of their own risk. We have this mentality that it won't happen to me, but really anywhere it can rain, it can flood. And NOAA estimates that 122 million people are at risk of flooding. Maybe a lot of that perception as well is shaped by the NFIP's mandatory purchase requirement. So if you live in a special flood hazard area, you have to purchase flood. I think maybe we've fallen into this trap that if you're not required to purchase flood, you may think you don't have a risk of flood, which is not the case. And then I think we also see a lot of homeowners that might not even be aware that their policies don't cover flood. They may think they already have that coverage, so they're not actively going out into the market and looking to purchase flood insurance.

So it's really important for insurers and agents to talk to policyholders about their flood options. Munich Re and Triple-I recently conducted a study to gauge what consumers understand about extreme weather, and 78% of respondents said that they either weren't at risk or they weren't sure of their risk of flooding. Meanwhile, 32% said that their home had been impacted by a weather event in the last five years. But the good news from that study is that for the homeowners that did understand their risk, 78% had purchased flood insurance. So I think this also just ties back into, if you're aware of your risk, you're more likely to purchase insurance. And then the last interesting item I found from that study is that 63% of homeowners were willing to spend up to $5,000 to protect their home from a weather related risk.

Tim Brockett:

So maybe more education, a little less optimism bias would go a long way. You did a nice job of laying out the problem. Munich has some solutions. So first we'll stay with you Serena and talk a little bit about the product solution that we've created to address the protection gap in the US for flood.

Serena Garrahan:

We're always looking for opportunities to fill an unmet need. So back in 2015, we looked at the market and we saw that opportunity. The existing solutions weren't really designed for average homeowners that lived outside of special flood hazard areas. So in order to reach a wider audience and to help close that protection gap, we built a solution that is attractive and affordable to homeowners. We understand that flood risk is still a relatively untested peril and that insurers may not be willing to take on that risk. So offering this as a white label endorsement gives carriers the ability to provide valuable coverage to their policyholders, backed by Munich Re's in-house expertise and financial strength. When a carrier partners with Munich RE to offer flood, we kind of act as an extension of their product development team, so we provide the rates, the rules, the forms that are needed to get that coverage up and running, and then we also take on that risk for our partners, providing up to 100% [inaudible 00:09:42] re-insurance allowing for risk-free commission income for our partners.

Looking to the endorsement itself, one of the key elements is that for most homeowners, flood is a partial loss peril. Therefore, homeowners might benefit from purchasing lower limits of coverage that also allow for a more affordable product. This endorsement offers limits up to $50,000, which is better suited to the needs of those homeowners outside of the special flood hazard area. The limit covers your dwelling, other structures, contents, property moved to safety, loss of use, and debris removal. We also wanted to provide some coverages for the most common losses when it comes to flooding, basement, personal property and loss of use. Those coverages are not provided under your standard NFIP policy, and this endorsement can be added onto most personal lines policies, including your homeowners, farm owners, dwelling and rent reforms, and the loss settlement follows your underlying policy. Most important, the pricing follows the riskiness of the location. Advances in flood modeling and granular elevation datasets allow the carrier to charge risk-appropriate premiums at a rooftop level. So for the vast majority of your policyholders, the resulting premiums are very reasonable.

Tim Brockett:

Flood within the home owners' policy, cost-efficient, location-based type pricing. It's a very slick product and certainly helps solve the protection gap as we've said. Alyssa, I want to turn a little bit now to risk management and portfolio-based solutions. Serena has given a nice overview of a product that we have that can help close the gap, but what else is Munich Re doing around risk management solutions for flood?

Alyssa Johnson:

Thanks Tim. FloodScape is the solution I'll talk about today and the idea of FloodScape was born out of a few observations in the market. First, the fully probabilistic models out there are first generation, and we've seen or observed some hesitancy in the market on relying completely upon this new and unproven output. Additionally, these models tend to be expensive relative to the size of the flood portfolios that many carriers are writing. And these two dynamics have led to a low adoption of these models overall. A second observation we made is that traditional accumulation methods, which rely on aggregation by zip code or county or maybe even state, but they don't contemplate location-level exposure and they don't translate well to the nature of flood risk. And then lastly, while FEMA flood maps do allow for stratification of location-level risk, as was mentioned earlier, these maps are often out of date. They may not cover all areas of the US and they aren't very granular in their analysis.

So if we look at all of this, we saw a gap where carriers might not yet be licensing other models, but still desire to upgrade the sophistication of their aggregation management for this peril. And with that came an opportunity for Munich Re to leverage our geoscientific and hydrological expertise to develop a novel way to think about correlated flood risk. So the end result is a geospatial dashboard that allows users to visualize and manage their property portfolio within curated flood aggregation zones.

Tim Brockett:

It definitely sounds like we're addressing a white spot in the industry for our clients. Can you get into some of the key benefits of FloodScape?

Alyssa Johnson:

Absolutely. The dashboard provides access to Munich Re's expertise, as I mentioned, and we have curated over 40,000 unique scenarios within the contiguous US that we believe are most realistic and representative of actual water flow along river and stream systems. The dashboard enables visualization of portfolio risks within these scenarios, but also quantifies the corresponding treaty exposed limit of a maximum possible loss net of re-insurance. And this analysis enables users to identify blind spots and drivers of their exposure at both the policy and location levels, which ultimately adds more color and context to probabilistic model PMLs.

Tim Brockett:

In terms of usage and development, who has access to this FloodScape tool and what stage of development is the product end?

Alyssa Johnson:

Currently, FloodScape is available to a small group of our clients to inform the setting and management of their risk tolerances and to inform underwriting guidance. There are a lot of possibilities around the data and the utility that we see that we can pull into the analysis, and we're actively building out more functionality every week. So we expect more insights to be available within the tool in the coming months. And I'll say, reception to this way of managing flood risk has been really positive so far. And this seems to be a solution that clients are eager to add to their toolkit as they look to incorporate multiple different views of risk.

Tim Brockett:

Well, I want to thank both Serena and Alyssa for explaining just how important it is for insurers, homeowners, and business owners to understand that the risk of flood is real and will continue to escalate, but also that flood risk is insurable with the right mix of well-designed products and innovative risk management solutions as Alyssa and Serena have alluded to. Stay tuned for our next episode of Nothing Assumed.