Over the past half century, homeowners looking to purchase a flood insurance policy had effectively one option: the federally backed National Flood Insurance Program. And Florida accounted for more than a third of its policyholders.
But as the federal program struggles with mounting losses and an increasing number of homeowners at risk for flooding, a burgeoning private insurance market has arisen offering to relieve pressure.
“It’s growing rapidly,” said Mark Friedlander, Florida representative for industry group the Insurance Information Institute. “The private flood insurers see this as a very viable market for growth.”
But making the switch carries its own risk, particularly for people who decide later to return to the National Flood Insurance Program. They could see their premiums spike.
Florida currently has nearly 83,000 private flood insurance policies as of September 2019, according to the Florida Office of Insurance Regulation. As recently as 2015, there were fewer than 1,000 policies. They still represent a small fraction of the 1.76 million government backed residential and commercial policies that the Insurance Information Institute says were in force in Florida in 2018.
The private flood market differs from the National Flood Insurance Program in a few key ways. One of the biggest differences is how much coverage a homeowner can get. Under the federal program, a homeowner can be insured for up to $250,000 for the home itself and $100,000 for the home’s contents. Private insurers, however, typically have significantly higher caps to allow homeowners to cover the full cost of their home.
Because of this, some homeowners that have a policy through the federal program seek additional coverage on the private market if their home value exceeds the federal cap. Florida had 6,239 supplemental private flood policies for homes as of September 2019, state regulators said.
“The private market is really a nice complement to what the [National Flood Insurance Policy] does,” said David DeMott, president of Gridiron Insurance Underwriters.
Gridiron is one of 31 companies Florida currently allows to provide private flood coverage, according to the Florida Office of Insurance Regulation. The three top providers of primary private flood policies are Security First Insurance Company, ASI Group and TypTap Insuranace Co.
Another major difference between the two markets is the way risk is measured. In the federal model, a home’s flood risk is determined by its “flood zone” — a geographic area that the Federal Emergency Management Agency rates based on the likelihood of flooding. These can encompass entire neighborhoods or sections of a town. But flood risk on the private market is determined on an individual property basis, rating just the specific home or business the policy would cover.
“The differences can be significant,” said James Watje, senior vice president of private flood for Wright National Flood Insurance Services, the largest writer of federal flood policies in the country. It also writes private policies.
This difference means that some homes might be rated as lower risk by the private flood insurance market’s more precise ratings when considered individually, resulting in lower rates. However, depending on the specific home, this could also work the opposite way, resulting in a higher rate on the private market.
“People switch to us because they’re getting better coverage at the same price or a better price than the (National Flood Insurance Program," said Paresh Patel, CEO of TypTap’s parent company HCI Group.
The federal government is currently planning to move to a new model of risk rating similar to the private market, which the Insurance Information Institute’s Friedlander said could spur more homeowners to compare costs in the private market.
Other differences between the programs are more nuanced. Private flood insurance policies can cover other structures on a property, such as a pool house or gazebo, whereas the federal program would require a separate policy for each. Some also reimburse the cost to replace an item lost to flooding as new, whereas the federal program only provides the depreciated value of that particular item.
One group the private flood market attracts in particular are homeowners who aren’t required by their zoning to have a flood policy, but could still be flooded by heavy rain or other events. The prices these homeowners may be offered could entice them to buy a policy even if they were never covered previously.
While the private market may have benefits depending on a homeowner’s individual situation, it can come with a hefty cost for those who want to move between the private and federal markets. Many participants in the federal program receive a subsidized rate for their policy that goes up slightly each year. Were they to go to the private market for coverage and decide they wanted to return to the federal program, they would no longer be eligible for that reduced rate. They may end up paying significantly higher rates than before that more closely reflect their actual risk.
Neither experts nor private flood insurance companies expect the private flood insurance market to replace the federal flood insurance program, saying it is likely to remain a complement.
“Shop your coverage no matter what it is,” Friedlander said.