Recent US flood losses likely well below NFIP reinsurance trigger: Fitch

Recent severe inland flooding across the United States, including the Kentucky floods that have devastated many communities, are not expected to result in losses that would trouble the National Flood Insurance Program’s (NFIP) reinsurance or catastrophe bonds.

The United States has been impacted by numerous inland flood events in recent weeks, Fitch Ratings reports, but while these have driven damage to properties and loss of life, as well as significant economic losses in affected areas, the credit impact to the U.S. P/C insurance industry is expected to be negligible.

Because of the still relatively low penetration of flood insurance coverage, especially in some of the worst affected regions like Kentucky, Fitch Ratings said the floods are unlikely to affect the capital or earnings of individual insurance or reinsurance companies.

Private market flood insurance uptake remains very low across the US, especially away from coastal areas, with less than 10% of homeowners buying coverage on average, a percentage that drops much lower in some regions of the country.

But the recent flooding “reveals the potential for catastrophic flood events in areas that have not traditionally been considered at higher risk,” Fitch explained, underscoring the need for more private flood coverage options.

The insurance and reinsurance market loss potential from inland flood remains relatively limited as a result, with standard homeowners’ insurance still not covering flood damage in the vast majority of cases.

“Some individual private markets offer stand-alone flood products and endorsements to homeowners’ policies, but given the relatively small market size, the overall impact to industry results will be limited,” Fitch said.

As a result, the government supported, FEMA run, National Flood Insurance Program (NFIP) remains the dominant source of flood insurance in most regions.

However, this tends to be where flood risk is considered higher and Fitch explained that “most of Kentucky is not considered at high risk of flooding according to FEMA.”

Of course, the NFIP has a robust reinsurance program in place, having renewed a $1.064 billion traditional reinsurance tower at the January renewals this year.

The rest of the NFIP’s reinsurance is sourced via its series of FloodSmart Re catastrophe bonds, of which it has $1.425 billion outstanding and providing it protection through this year.

But FEMA’s private market reinsurance is really designed to protect it against flood events driven by hurricanes, which are considered the main event that could drive a really significant flood loss for the NFIP.

“For example, for Hurricane Harvey in 2017, the NFIP paid policyholders over $9.0 billion in claims and recovered the entire $1.042 billion limit from its reinsurers,” Fitch highlighted.

While loss estimates are not yet available for the recent inland flooding in the United States, including the Kentucky flood event, Fitch notes that these would “likely be considerably below the 2022 catastrophe reinsurance program attachment.”

“Losses begin to cede to the reinsurance program when insured NFIP losses for an individual event reach $6.0 billion,” Fitch said.

Broker Aon recently estimated that the Kentucky floods would cause an economic loss of more than $1 billion, but also noted the low uptake of flood insurance in the affected region.