Bank of America’s Flood Insurance Study

Bank of America (BofA) has made a statement about flood insurance and the conclusion is something we all already know. The National Flood Insurance Program (NFIP) has rates that are — still — way below levels considered actuarially sound.

Since the NFIP was formed in 1968 and since then it has piled up $25 billion in losses and predictions over the next five years see the NFIP adding $2 billion to $3 billion more per year.

Josh Shanker is the BofA analyst responsible for the study. He said underpricing — especially on the nation’s hurricane-prone coastal areas — has kept the public from knowing the true risk costs. He and the experts at BofA say better prices for low-risk properties could help open up the private risk pool and stabilize prices for private insurers and the NFIP.

It’s much needed. Premiums for NFIP policies grew about 12% from 2020 to 2024. However, overall, average premiums declined in that time frame. Cross-subsidies kept prices low in flood-prone areas and safer regions subsidized premiums in those areas.

Nationwide most losses have been concentrated in just 36 counties. Most are on an ocean or the Gulf of Mexico and they account for half of all the NFIP’s claims. And the biggest drain on the NFIP — and those subsidizing premiums for those 36 counties — came from Hurricane Katrina in 2005, Hurricane Sandy in 2012, Hurricane Harvey in 2017 and Hurricane Helene in 2024.

The bank says the NFIP’s Risk Rating 2.0 — an overhaul passed by Congress a couple of years ago — is helping to get prices to actuarily sound levels. But it’s not pushing them all that fast and it will likely be a decade before prices reach levels that are actuarily sound.

Again, another opportunity for private insurers.

Source link: SeekingAlpha — https://bit.ly/4hKqWAf