US flood carrier NFIP sees 50% of policies underpriced for 5Y

Flood insurance premium rates at the US residual insurer NFIP have been sufficiently suppressed to keep 50% of the book priced below actuarially sound levels for the next five years given the glidepath on rates for clients grandfathered into the new, more rigorous, pricing system.

“The risk is far greater than what we thought in many areas,” the NFIP’s senior executive David Maurstad told the Federal Advisory Committee on Insurance of the impact of a new pricing model, Risk Rating 2.0, at his organisation. 

The new pricing model, implemented in stages from October 2021 through April 2023, doubled down on model usage and goes property by property to establish what NFIP can call a full risk rate. New clients are being hit with the new pricing from day one. Existing clients, of which 2/3 are paying below the full risk rate, can only advance towards the actuarially sound level at a maximum pace of an 18% increase per year.  

“The estimate is that at the end of five years, 50% of our book will be at full risk rates and at the end of ten years, 90% of our book will be at full-risk rate,” Maurstad said. “For the last 10%, some of them go way beyond 20, 25 years.” 

“That is how underpriced they were in the old system and the type of risk signal we were sending them and their communities,” he said. 

Average premium went up in the shift to the new system, with caveat for the impact of inflation during that period. Maurstad cited a national average premium near $685 as the old system was retired versus neighbourhood $950 now. 

But despite the rise in average premium, the new pricing model appears to be having a positive impact on overall affordability, Maurstad further indicated. A prior trend towards decreasing policy counts appears to have largely levelled off since the pricing model implementation, he said. 

NFIP does not have sufficient policyholder data to describe any demographic split of who has been paying what. Maurstad said he suspects that the roughly one million policy holders who managed a premium reduction are low income policyholders in low value property. 

The NFIP is urging Congress to enact means-based subsidies for low income homeowners and to subsidise the NFIP for the lingering shortfall to actuarially sound rates.  

“The risk is far greater than what we thought in many areas,” the NFIP’s senior executive David Maurstad told the Federal Advisory Committee on Insurance of the impact of a new pricing model, Risk Rating 2.0, at his organisation. 

The new pricing model, implemented in stages from October 2021 through April 2023, doubled down on model usage and goes property by property to establish what NFIP can call a full risk rate. New clients are being hit with the new pricing from day one. Existing clients, of which 2/3 are paying below the full risk rate, can only advance towards the actuarially sound level at a maximum pace of an 18% increase per year.  

“The estimate is that at the end of five years, 50% of our book will be at full risk rates and at the end of ten years, 90% of our book will be at full-risk rate,” Maurstad said. “For the last 10%, some of them go way beyond 20, 25 years.” 

“That is how underpriced they were in the old system and the type of risk signal we were sending them and their communities,” he said. 

Average premium went up in the shift to the new system, with caveat for the impact of inflation during that period. Maurstad cited a national average premium near $685 as the old system was retired versus neighbourhood $950 now. 

But despite the rise in average premium, the new pricing model appears to be having a positive impact on overall affordability, Maurstad further indicated. A prior trend towards decreasing policy counts appears to have largely levelled off since the pricing model implementation, he said. 

NFIP does not have sufficient policyholder data to describe any demographic split of who has been paying what. Maurstad said he suspects that the roughly one million policy holders who managed a premium reduction are low income policyholders in low value property. 

The NFIP is urging Congress to enact means-based subsidies for low income homeowners and to subsidise the NFIP for the lingering shortfall to actuarially sound rates.  

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