USA – California Floods Present a Good Test for the Private Flood Insurance Market

The catastrophic flooding in California from late December 2022 to January 2023 resent a good test for the private flood insurance market, according to credit rating agency AM Best.

Credit: European Union, Copernicus Sentinel-2 imagery. This Copernicus Sentinel-2 image of 14 January 2023 shows flooded areas in Glenn county, in central California.

Private flood insurance accounts for over 40% of California’s entire flood market, a significantly larger share than in other leading states.

The inadequacy of the National Flood Insurance Program’s (NFIP) rates has been apparent for some time, AM Best said, but the recently implemented Risk Rating 2.0 has increased the potential for more private insurers to provide flood insurance options outside the federal program.

However, just 2% of California residents have purchased flood insurance, and the state’s NFIP policies represent just 4% of the NFIP’s total policies. This indicates that the majority of flood losses suffered by homeowners and businesses will not be covered by insurance.

“Homes in California protected by NFIP insurance may still be underinsured, given that NFIP insurance is limited to $250,000 per residence, well below California’s median home value of nearly $685,000, the second-highest in the country,” said Christopher Graham, senior industry analyst, AM Best. “Many homes covered by the NFIP would benefit from an excess policy above the NFIP coverage limit, so opportunities abound for private flood insurers willing to take the risk,” a new AM Best commentary reported.

Historically, private flood insurance has been profitable for California’s top private flood writers, but the extensive damage from the current storms may be enough to wipe out several years of good results.

However, the commentary also notes the regulator’s directive to insurers stating that mudslides, which are typically covered by flood insurance, are to be covered under a homeowners or other property policy as a fire loss if the hill in which the mudslide emanated was previously weakened by fire. Although the total economic loss would be unaffected, the decree may shift some losses from flood policies to other property policies.

Recently the California Geological Survey and U.S. Geological Survey announced they had mapped almost 600 landslides in California since 30 December 2022.

Map of landslides in California, December 2022 to January 2023. Image: California Geological Survey