California flooding

Since late December the state of California has experienced fierce storms, torrential rain, high winds and flooding. Thousands of people have been evacuated from their homes, more than half a million homes have been without power and at there have been at least nineteen deaths. Additional rain on already saturated ground is creating further flood potential, with rapidly rising rivers, mudslides and flash floods. Economic losses have been estimated to exceed US$30 billion.

Insurance losses are projected to be much smaller than forecast economic losses. Most analysts’ estimates centre on an insured loss of around $1 billion. The large discrepancy needs some explanation. Flood is typically excluded from homeowners’ property insurance and frequently excluded or sublimited in commercial property contracts. Take up of flood insurance is generally quite low; a recent AM Best report (here) estimates that just 2% of the state’s residents buy flood cover. The market for flood insurance is dominated by the US government’s National Flood Insurance Programme (NFIP). NFIP has a 60% market share. An insurance event of this magnitude will not impact on the reinsurance programmes of local insurance companies in a material way and is not expected to be a significant event for any syndicate.

There are a number of commercial insurers, including Lloyd’s syndicates such as Hiscox 33 and TMK 510, which offer an alternative to the NFIP, including higher limits, products for commercial properties and better service standards. More details on the Hiscox FloodPlus product can be found here. Underwriters think that there is an opportunity to increase the underwriting of flood insurance for homeowners and businesses across the USA, using high quality algorithmic underwriting coupled with a depth of underwriting experience.