Flood Resiliency

FEMA’s Revisions May Result in Less Flood Protection

FEMA's recent flood map exempted about 60,000 homeowners in New Orleans from required NFIP coverage. Will private insurers step in to offer protection?
By: | October 18, 2016 • 4 min read

No one is more impressed than Susan Williams by the shoring up of 50 levees and rehabilitation of flood walls and pumping stations overwhelmed when Katrina struck New Orleans hit in 2005.

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Nor is CoreLogic’s content strategist surprised by the result: FEMA map revisions that removed nearly 60,000 homes from the Special Flood Hazard Areas (SFHA) on Sept. 30, exempting their owners from mandatory compliance with NFIP flood insurance requirements.

But Williams’s buoyant mood comes with a caveat.

“If the lender only follows the government guidelines, homeowners would not be required to obtain flood insurance. But just because they’re not in that flood hazard area anymore because of the new mapping doesn’t mean the flood risk has gone away.”

John Elbl, vice president, AIR Worldwide

John Elbl, vice president, AIR Worldwide

John Elbl, vice president at AIR Worldwide, agreed with that assessment, fearing individuals still at great risk may elect to drop flood coverage from their policies to save money in the short term.

“We’re hopeful private insurers will step in to help fill this protection gap by charging actuarially sound rates and providing policyholders with more comprehensive coverage options.”

The problem may not be private insurers, however, but the banks. A year ago, Elbl noted the opportunities for insurance industry to provide alternative coverage to the NFIP ran into complications, not the least of which was reluctance on the part of banks to accept policy wording that wasn’t identical to the NFIP’s.

That uncertainty, he said at the time, “restricts the ability of the customer to choose private coverage.”

Today, Elbl said insurers considering entering the market to compete with the NFIP are pinning their hopes on expected NFIP rate increases driven by the program’s $24 billion deficit and its inability to offer more than limited coverage for policy holders.

“NFIP policies do not cover basements, do not include payouts based on loss of use of a property, and only pay actual cash value, less depreciation, as opposed to standard HO3 policies which pay out full replacement costs.”

Another bright sign, added Williams, are for properties in areas of greatest risk and who pay the highest rates.

“The cost of flood insurance should go down and hopefully that will in turn make people more interested in getting coverage. That in turn adds to the resilience of the area.”

Overly Optimistic Message

Dean Basse couldn’t disagree more. The general manager at Dan Burghardt Insurance in New Orleans said an overly optimistic message to cash-starved homeowners about the city’s improved levee system will disincentivize them from obtaining flood insurance when they’re no longer required by federal law to do so.

“We can’t give away a policy unless they’re forced to buy it,” says Basse. “They won’t buy flood insurance voluntarily even at the PRP rate.”

Moreover, the infrastructure rehab along Louisiana’s 300-mile coast line, said Basse, may not be the final answer in flood protection.

“They spent a billion dollars to build this giant rock wall and someone forgot that it’s still built on mud. Our mud is not known for being the most solid thing in the world. And it’s sinking.”

Jackie Noto, model product manager, Risk Management Solutions

Jackie Noto, model product manager, Risk Management Solutions

It gets worse, Basse added, the next time another major catastrophe hits New Orleans like Katrina, like Betsy in 1965 or the “thousand-year rain” that dropped onto Louisiana this year.

Jackie Noto’s concerns are more for the NFIP itself, which was intended, the model product manager at Risk Management Solutions said, to support the original charter and objectives of the Flood Protection Act.

Unfortunately, said Noto, “the NFIP is 50 years old and its methodologies and approach haven’t aged gracefully.”

What the NFIP must do, she said, is “move away from this `in or out’ mentality. What matters is the depth, severity and frequency of flood risk for our entire area.”

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“That’s also been proven in the recent Louisiana flooding as well where buildings that were damaged weren’t considered on plain and still aren’t as recently as FEMA’S map updates. That’s definitely not an adequate approach.”

To those insurers who believe there is no such thing as a bad risk, only a bad price, Noto said their business actually improves the more they are able to differentiate risk.

“When they have information on the level of protection and probability of flood defense failure, that allows them to price risk to reflect the appropriate risk itself.”

Unfortunately, Noto added, “that’s not something the insurance industry is used to.”

David Godkin is a freelance magazine writer based in Toronto. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]