Lack of flood coverage will change market
The recent hurricanes and the resulting damage they’ve caused are making people think again when it comes to buying flood insurance, Alan Levin, vice chair at law firm Locke Lord, told PCI Today.
Levin said that given the sheer amount of capacity in the market, there is an opportunity for both standard reinsurance and the insurance-linked securities (ILS) market to step in and provide reassurance to the primary industry, helping them take on this risk. The issue of underinsurance on flood was brought to the fore in the wake of hurricanes Harvey, Irma, Maria and Nate.
“One of the things we’re seeing after these cat events is that a minimal percentage of people had flood insurance. The question is whether we can develop an alternative market on the primary side that can offer coverage at a proper rate and get people to take it up,” Levin said.
“That lack of coverage adds a huge financial burden to communities and to people’s lives, when they have no flood cover and most of the damage was from flooding.”
According to Levin, the rise in flood damage has been partly because of urban development, with a great deal of building in recent decades along the coast of Florida and inland.
“If you look at the developments in Houston and the loss of wetlands there, and at the number of huge apartment buildings next to waterways, that’s a phenomenon of the past 30 to 40 years. There’s been massive development in flood-prone areas over the past few decades,” Levin said.
An additional question is whether the market can price flood insurance properly and whether people will take it up. Flood as a peril was removed from many insurance policies decades ago, with the National Flood Insurance Program being established in 1968 as a consequence.
Levin added that in the wake of the recent storm activity, the ILS market is likely to continue to grow and expand to meet the demand of investors and the market for cover.
“We should feel good about that—there are alternative markets that are able to reinsure the risk,” he said. “We should feel positive that the ILS market is not likely to see disputes and that investors are stepping up and paying.
“Those are all positive signs at a very difficult time, because how are we going to get personal lines and small commercial coverage for people in flood zones? That’s the political challenge and also the pricing challenge,” he concluded.
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