Private flood insurers not yet ready to fill massive U.S. protection gap
By L.S. Howard
The flood insurance protection gap in the United States is massive, but the take-up rate of private flood insurance continues to be low. The relative inability of private insurers to penetrate the flood insurance market has been blamed on the lack of risk models, low consumer demand, high private premiums and, most of all, on the availability of relatively inexpensive government-sponsored insurance.
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Part of the problem is that the government’s National Flood Insurance Program (NFIP), which is managed by FEMA, dominates the flood insurance market.
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[Robert Muir-Wood, chief research officer for RMS] emphasized how flood risk is arguably more of a definable peril than even hurricane and earthquake. He provided a technical explanation of modeling, which faces two classes of uncertainty: “epistemic” uncertainty and “aleatoric” uncertainty. Epistemic uncertainty is what you don’t know, while aleatoric uncertainty is the basic randomness associated with the risk, he said.
“When you think about hurricanes or earthquakes, there’s actually a lot of aleatoric uncertainty, because wind is a chaotic process. One house is hit by strong gusts, while the next house is missed by strong gusts. The peril can be very variable on a small scale, and it’s not possible to model that full variability,” Muir-Wood continued. He noted that the same applies to earthquake ground motion, which is chaotic and complicated.
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How to increase penetration
The Lloyd’s report on the insurance protection gap noted that in the countries where flood risks are automatically included in insurance policies for households and businesses, penetration rates are generally higher. “For example, in the U.K., take-up rates for residential property insurance are more than 90 percent, while for home contents (for which flood damage insurance is not required by mortgage lenders), insurance penetration can drop to just 44 percent,” said the Lloyd’s report titled “A world at risk—Closing the insurance gap.”
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