We need to bridge the flood insurance ‘coverage gap’

Traveling across the country as CEO of the Insurance Information Institute, I encounter a challenge facing property/casualty insurers and communities alike: A lack of public understanding of “coverage gaps,” also sometimes also called “protection gaps.”

This is a big problem; one that is global in scope. According to a recent study from Swiss Re, more than 70 percent of all catastrophe losses worldwide spanning the decade from 2005 to 2015—an amount estimated in the neighborhood of $1.3 trillion—were uninsured. (1)

Coverage gaps are what happens when there’s a disparity between insured losses (damages that are covered under an insurance policy), and uninsured losses, which are paid for out-of-pocket by individuals who are affected by a catastrophe or other event. It’s also a complex-sounding catch-all phrase often used to describe a broad range of situations, such as macroeconomic conditions that necessitate governments to rebuild and restore communities after a disaster. 

The sorts of coverage gaps that happen to most of us are the ones that occur when homeowners, renters and business owners are exposed to risks through uninsured or underinsured losses. And in terms of overall impact, it’s these smaller coverage gaps that can cause the biggest economic disruption, oftentimes by dragging out recovery from either a natural or man-made disaster. What we all—insurers, regulators, communities and individuals—should be asking ourselves now is, where are our coverage gaps, and what are we doing to reduce our exposure to uninsured losses?

Flood is one of the largest uninsured risks, especially on the U.S. East and Gulf Coasts. The reason for this is that damage from flooding, including flooding from hurricane-generated storm surge, typically is not covered by standard homeowners or commercial insurance policies. Also, flooding isn’t just a coastal issue. Many losses from Hurricane Harvey (2017), superstorm Sandy (2012) and Hurricane Irene (2011) were inland, and in 2017, flooding in Missouri and Arkansas alone resulted in more than $1.7 billion in damage (2).

This means individuals foregoing the purchase of a FEMA National Flood Insurance Program (NFIP) policy—separate and apart from their homeowners or renters insurance policy—and counting on FEMA financial aid to rebuild their lives after a flood—are making a mistake. The federal government places a $30,000-plus ceiling on what FEMA may give in the form of direct assistance to flood victims, with typical payouts averaging around $9,000. Clearly, the difference between $9,000 (or even $30,000-plus) and the cost of rebuilding a home or business destroyed by flood, is huge.

FEMA’s NFIP was created by Congress in 1968. The NFIP is a good idea in principle—the federal government was providing a form of insurance that was not widely available at the time from the private sector. However, after 50 years of existence, the NFIP has become financially unsustainable. It has evolved too slowly over the years to keep up with the growing frequency and severity of flood-caused property losses. Yet even with the NFIP as a backstop against a total loss, people still go it alone: An average of only 14 percent of the 3.3 million households in counties declared federal disaster areas after Hurricane Irma ravaged Florida in September 2017 had NFIP coverage (4). Equally frustrating are the reasons why many decline to purchase NFIP coverage, including a lack of awareness that they are not covered for flood-caused damage under their homeowners, renters or business policies, underestimating the risk of flooding, and the cost of coverage (5).

Clearly as Americans, we all can do a better job of insuring our homes and businesses—and this job starts with having the right information.

So what does “better” look like? Here are some important things to consider:

• Covered vs. Not Covered: For starters homeowners, renters, business owners and others should look at all insurance policy documents to learn what is and what isn’t covered. Knowing the risks is what insurance is all about—understanding that when a person purchases an insurance policy, they are transferring risk to an insurer. A good first step is contacting an insurance professional and to find—and close—any coverage gaps. Those residing in hurricane-prone states have reason to act quickly. Hurricane season starts on June 1 and NFIP policies typically have a 30-day phase-in period.
• Ongoing Reviews: Businesses and households also should review insurance policy coverages annually at a minimum to be sure there’s no gap between insured and uninsured losses.
• Rebuild vs. Rebuy: Purchase the type and amounts of coverage adequate to rebuild a home or business, and not just to “rebuy” it (ignore the “Zillow Zestimate”). The latter refers to a property’s market value, so it’s important to know a property’s insured value.

Private sector insurers are increasingly stepping up to help residential and business customers close their flood insurance “coverage gaps,” and FEMA’s NFIP has publicly embraced this sort of competition as a way of improving flood insurance for all. Indeed, recent news of the NFIP’s prospective expanded investment in reinsurance and the purchase of its first-ever catastrophe bond to contend with the realities of flood risk are positive steps toward finding private sector solutions to existing problems. We look forward to sharing news of further developments like this in the future.

 Sean Kevelighan is Chief Executive Officer of the Insurance Information Institute, a non-profit research, education and communications organization dedicated to improving public understanding of insurance — what it does and how it works. He has served in various public sector posts in Washington, D.C, including his role as spokesman on economic issues as well as Senior Advisor for the Office of Tax Policy for the Department of Treasury, and as Press Secretary for the Office of Management and Budget, both under President George W. Bush. More recently, Kevelighan has held executive posts at Zurich Insurance Group and Citigroup.