Temporary NFIP Extension Provides Short-Term Relief during Hurricane Season

The US Congress recently approved a short-term extension for the National Flood Insurance Program (NFIP) amid hurricanes Helene and Milton bearing down on Florida. However, a lasting solution for the financially challenged federal flood insurance program may require private insurers to assume more flood risk. Despite opportunities for growth, private flood insurers' market share remains largely unchanged, according to an AM Best report. 

The report, titled "Temporary Extension Protects NFIP Through Hurricane Season, Longer-Term View Is More Clouded," outlines how population shifts toward coastal areas have driven significant residential and commercial construction in flood-prone regions. These developments have elevated flood exposure at a time when the frequency and severity of flooding events have surpassed earlier projections. Although the NFIP introduced its Risk Rating 2.0 to address pricing imbalances and improve property-specific risk assessments, the program still carries a substantial debt of almost $21 billion. With losses from Hurricane Helene and Hurricane Milton, this debt may rise even further. Additionally, NFIP policy counts are decreasing, partly due to affordability concerns stemming from the updated rating structure. 

While private flood insurers have primarily offered coverage for commercial properties, there has been limited uptake of this option in the market. "As pricing for NFIP increases, premiums may become more adequate relative to the risks, but private flood insurance also may become more competitive, further spreading the risk," David Blades, associate director of industry research and analytics at AM Best, said. "Whether private insurers have the appetite for additional flood risk remains to be seen." 

AM Best's data indicate that private insurers, accounting for roughly one-third of total direct flood insurance premiums, have achieved more favorable financial outcomes than the NFIP. In 2023, private insurers reported a combined ratio of 32.3 percent, significantly lower than the NFIP's 90.2 percent. Though private insurers steadily increased their share in the flood insurance market from 2020 to 2022, that expansion halted in 2023. The report highlights that in states like Florida and other hurricane-prone areas, the proportion of privately purchased flood insurance remains below the national average. 

"The slow growth could reflect private insurers' unwillingness to write more due to increasingly unpredictable weather, or perhaps hesitation from insureds to switch to privately underwritten flood insurance," said Christopher Graham, senior industry analyst at AM Best. "However, without the NFIP, there would be a large void in the flood insurance market—one that private flood insurers do not appear eager to fill at this point."