10 September 2017 Insurance

Harvey shines spotlight on the NFIP

Flood losses triggered by Hurricane Harvey, which struck Texas at the end of August, are likely to push up the debt of the US National Flood Insurance Program (NFIP) and affect its reauthorisation set for the end of September, Matt Reid, managing director of JBA Risk Management USA, told Monte Carlo Today.

Hurricane Harvey developed into a Category 4 storm and made landfall near Rockport, Texas on August 25. In addition to direct losses, the storm caused heavy rainfall and storm surge-related losses along the coast of Texas.

“Harvey will be a significant event for the NFIP, which has $2 billion in cash in hand and a further $6 billion in borrowing capacity,” Reid said.

The NFIP currently has $23 billion of debt owed to the US Treasury and a total borrowing capacity of $30.4 billion, which could be reached with losses related to Harvey.

“It seems likely the NFIP will find itself further in debt to the Treasury as claims for Harvey are paid,” Reid said.

The NFIP placed its first significant reinsurance programme in January 2017, ceding $1.04 billion of coverage to a group of 25 private reinsurers and Lloyd’s syndicates in an effort to reduce the accumulation of future debt to the Treasury.

Reinsurers will cover 26 percent of losses between $4 billion and $8 billion arising from a single flooding event.

“They are exposed to a little over $1 billion in potential reinsurance payments. It seems likely that the reinsurance will be triggered and may even hit the upper limit,” Reid said.

“For sure, Harvey will shine a spotlight on the reauthorisation of the NFIP,” he noted.

Harvey could potentially make it more likely that reforms to the programme are included, Reid suggested. But it could also prompt the legislature simply to extend the programme—given the circumstances surrounding Harvey—and delay any significant changes to how the programme is managed and/or structured, he added.

Be this as it may, there are lessons to be learned from Harvey.

“We should consider what Harvey tells us about the penetration of flood insurance. It seems certain that many people will experience significant loss and not have flood coverage. Better understanding of the underlying risks is what insurance programmes need to build on,” Reid said.

He added that Harvey should also act as a timely reminder that while rare, large flood events—even those with a 500-year-plus return period—should not be considered inconceivable.

“At the same time Harvey teaches us that having a good understanding of all sources of flooding is important. Surface water flooding will be a large factor in the overall damage caused by Harvey.

“The volume of rain that fell meant flooding was seen in many areas where river flooding (which many people think of as the sole source of flooding) has never been seen. At JBA we explicitly model different sources of flood for precisely this reason,” he added.

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