What a season it’s been. From Harvey to Irma to Maria, the world watched as the US and the Caribbean lurched from one hurricane to the next, each successive one piling on more misery.
The quick succession in which they came and the sheer amount of damage we all saw on TV has had people asking whether hurricanes are getting worse or not. According to scientists and experts in weather patterns, the short answer is “yes, they are getting worse.” However, that’s not to say we’re having more hurricanes.
The evidence suggests that hurricanes are in fact fewer. For instance, Harvey in the first hurricane to make landfall in the US in 11 years. However, what is getting worse is the intensity of those storms. They are stronger and causing far more damage. Hurricane Katrina had been the most expensive flooding in US history, at a cost of $160 billion, but experts believe that the recent storms will outstrip that number. Fortune magazine for instance, estimates that hurricanes Harvey and Irma, may end up costing between $150 billion and $200 billion in damage and lost productivity to cities like Houston and Miami, which were hit by them.
What does this mean for the insurance industry?
Specifically, how will it affect flood insurance rates? Will the National Flood Insurance Program (NFIP) be gone, leaving only Write Your Own (WYO) Plans?
It is difficult to predict the answer to these questions and what effects these storms will have on the current flood insurance system. With regard to how the hurricanes will affect the insurance industry and flood insurance rates, it has been suggested that it could lead to a rise in insurance rates even for those who do not live in one of the areas hit by the hurricanes. This is because insurance companies will have to pay out billions of dollars to customers whose properties were destroyed or damaged by winds for, example.
Effect on NFIP and WYO
Financial analysts and insurance experts predict however, that it is the NFIP that will bear the brunt of these disasters. Established by Congress in 1968 after Hurricane Betsy, which had caused extensive flooding in Florida and Louisiana in 1965, the NFIP is administered through the Federal Emergency Management Agency. Even though Harvey and Irma were accompanied by heavy winds which caused their own damage, much of the damage that people suffered would have resulted from flooding, and this is covered almost entirely through the NFIP. But according to the Insurance Council of Texas, only about 20 per cent of homeowners have flood insurance in Texas, meaning that uninsured losses will be quite significant.
Fortunately for those with flood insurance through the NFIP, they can recoup some of the damages and will get money from the program to help rebuild their homes. However, whether the NFIP will be able to cope with the burden is another matter. The NFIP was already financially strained prior to hurricane Harvey and hurricane Irma, and was $24 billion in debt. With this in mind, it is not inconceivable that the projected cost of these new storms could overwhelm the NFIP, and probably lead to its demise.
If that happens, that would leave only the WYO Program available to people. WYO is a program available under the NFIP that allows participating property and casualty insurers to issue NFIP flood insurance policies in their own names. The companies receive an expense allowance for the policies they write and the claims they process, while responsibility for underwriting losses remains with the federal government, which reinsures 100 percent of the coverage. In a scenario where only WYO is available, then more private insurers could step in to the flood insurance market with private policies. This would give consumers more choices for coverage and possibly even lower rates than those charged by the government.