Extreme weather exacerbates the challenges facing the U.S. flood insurance industry. Can private flood insurance companies handle the challenge? Aon Edge CEO John Dickson is confident that private flood providers, including Aon Edge, can. “I'm an optimist. And I do think this industry is on solid footing. I think we're making inroads and making a difference in helping people recover from the devastating consequences of the number one natural disaster in the U.S.,” he says.
 

Climate Change and Increasing Flood Claims

The weather is changing. The Environmental Protection Agency (EPA) reports that heat waves, heavy precipitation, tropical cyclone activity and river flooding are occurring with greater frequency. “The third rail that nobody wants to touch,” says Dickson, “is the increased ambient air temperature. It all starts with the temperature rise, in my opinion. Put simply, higher temperatures allow our atmosphere to holder greater amounts of water.” When that water becomes precipitation, we see an increase in flooded homes and insurance claims.
 
Dickson says, “Flooding is the reigning heavyweight champion of natural disasters. Every state in the country in the last five years has experienced a flood. You can't say the same about earthquakes, hurricanes, or tornadoes. Flooding is far and away the number one natural catastrophe in the U.S. Flooding truly occurs everywhere.”
 
On average, since 2000 at least one flood occurred in the U.S. on nearly 300 days per year, and yet only approximately 4 percent of American homeowners have flood insurance. Why is this?
 
According to Dickson, deciding whether to purchase flood insurance is a question of values. “Do you value your home? Is this a critical investment? Is this something that you're looking at as the cornerstone for your family? How much of that are you willing to put at risk?”
 
He recommends insurance agents get to the heart of the issue when discussing flood insurance with clients. He says agents can ask clients, “Close your eyes. Imagine your home under a foot of water. Can you afford that? That's likely going to cost you $40,000 to $50,000.” When clients get a picture of how much they can lose, choosing to purchase flood insurance is an easy decision. If your clients say, “I can’t afford flood insurance,” he says agents should ask, “Can you afford to not have it?”
 
Many American homeowners, however, make their decisions based on the Federal Emergency Management Agency (FEMA) flood zone maps. Frequently, Dickson says, Americans think they only need flood insurance if they are in a high-risk flood zone. He points out flood zones are not binary. Being in a high-risk zone does not guarantee your home will flood and being in a lower-risk zone doesn’t mean your home won’t flood — only that there is a lower risk.  “Water does not stop at imaginary lines drawn on the map. Water goes wherever it can, and the flood maps are creating this false sense of security that gets disabused time and again.”
 

The NFIP & Risk Rating 2.0

Under the National Flood Insurance Program (NFIP), flood insurance is required for properties located in high-risk flood zones with mortgages from federally backed lenders. There are a handful of policy options available with set replacement value limits. For decades, homeowners have used FEMA flood maps to guide their flood insurance decisions, with those in high-risk flood zones purchasing flood insurance, and many of those in lower-risk areas believing they don’t need it.
 
But as the climate changes, flooding is affecting more people in lower-risk flood zones. From 2015 to 2019, more than 40 percent of NFIP claims were from homeowners outside high-risk zones. 
 
Dickson says, “The NFIP is like an ice cream shop with one flavor, and they get one scoop in one container. That's it. And that just doesn't work for everybody. That works for a lot of people, but not for everybody. People have individual needs. People have different goals they’re aiming for in different seasons of their lives, so you must have different solutions that fit individual needs if you want to reach as many people as possible.”
 
In recent years, the private flood insurance industry has become an appealing option for homeowners who want policies with faster activation, more customization, higher coverage limits, and broader personal property protection.
 
The FEMA is currently making strides to update the NFIP with Risk Rating 2.0. First introduced in October 2021, the program is designed to make NFIP rates and methodology more equitable and accurate.
 
Dickson says, “I applaud FEMA for what it's attempting to do. The very one-dimensional rating structure that they used previously did not serve anyone, and it took a lot of inertia to make that move.”
 
Dickson believes multi-dimensional rating structures are key to a successful insurance business. “Today, the private industry harnesses the power of computer models to help understand this risk and to quantify this risk. While none of these models are perfect, they provide critical insight and guidance to help manage flood risk.”
 
“Therefore, when using computer estimations of risk, it is important to understand the limitations and make sure you're using common sense.  Never rely solely on a modeled perspective of risk and always make sure you keep a keen eye on distribution and risk diversification.  When we think about flood risk today and how to manage that, it really requires all the disciplines of competent, thoughtful, professional underwriting to be successful.”
 

The Future of Private Flood Insurance

As the NFIP is going through a time of change, the private flood insurance industry is seeing significant growth, with direct premiums increasing by 42 percent in 2021. Dickson attributes these changes in the industries to the challenges the NFIP faces as a government program.
 
“The private flood insurance industry is growing faster than FEMA, and I think it will continue to do so. The private industry has two things working in his favor. First, unlike the NFIP, it's not a bureaucracy. The government does amazing things for millions and millions of people, but that requires a substantial infrastructure of bureaucracy, which means it moves slowly.  Private industry will always be nimbler.”
 
“Second, the NFIP has an incredible mandate that is almost impossible to realize.  On one hand, it operates as an insurance company working to successfully bear risk in a sustainable fashion. On the other hand, it has to be a social assistance program able to help all homeowners wherever situated. At times, those two personas conflict. And that creates the challenge that the private industry doesn’t have to resolve.”
 
In the private flood industry, “We don’t have to worry about that. We don’t insure homes located in coastal barrier resource areas. We don’t insure homes that have had severe, repetitive losses.”
 
Dickson is confident that private flood insurance providers will continue to grow. The key, he says, is that “it has to work for our communities. It has to work for insurance professionals. It has to work for our capital markets.”
 
“And that's what we strive to do – deliver solutions that work. Our passion is to design, deliver and support flood insurance solutions that work for everybody.  By doing so, we help build a resilient country, we help communities recover faster from these devastating events, and we help families in their times of greatest need.”