Flood Insurance

Flood at the Crossroads

Better modeling and regulatory changes could mean greater private sector participation in flood insurance.
By: | October 15, 2015 • 8 min read

While the federal flood insurance program remains mired in debt, changes are afoot in the private sector insurance market that point to a greater role for property/casualty insurers.


One, there is ample risk-transfer capital in the private sector — capital looking for a home.

Two, changes are occurring in modeling that are going to make this risk much more palatable for commercial insurers, provided they can get the price necessary to sustain the profitability of their portfolios.

Three, federal legislators are fine-tuning legislation to remove any ambiguity on the part of lenders that private sector policies are adequate to cover a risk that’s been held primarily by the federal government for the past 50 years.

Let’s move first to the modeling.


Tom Larsen, chief product architect, CoreLogic

Tom Larsen, an Oakland, Calif.-based chief product architect for CoreLogic, reports that significant increases in computing power mean that his firm can map and model flood risk with a granularity that it could not provide previously.

“You go back to how well you can measure it,” Larsen said.

“Flood risk is very specific. One house got it and one didn’t. It’s a matter of understanding the elevations at a very granular level,” he said.

In September, CoreLogic released a flood model that provides granularity on elevations to within 10 meters. Larsen said the company is working to increase that level of detail even further.

“As a modeler we are just going to keep pushing it,” Larsen said.
CoreLogic competitor RMS is also advancing its computing and modeling capabilities, to the point where it hopes to have a cloud-based flood solution to market in late 2016 or early 2017. The product will allow insurers to upload their entire property portfolio and calculate flood exposures.

The demand from carriers is there, according to Matthew Nielsen, senior director of global government and regulatory affairs with RMS.

“The folks that are writing the large commercial risks are saying, ‘We need this yesterday,’ ” Nielsen said.

“The folks that are writing the large commercial risks are saying, ‘We need this yesterday.’ ”  — Matthew Nielsen, senior director of global government and regulatory affairs, RMS

Consider that a flood model for the U.S. with resolution down to 50 meters creates a grid system with 32 billion cells. That’s a huge amount of data for a modeler to process, not to mention its clients.

Nielsen and RMS hope to spare the carriers the cost of investing in that much technology and use this cloud-based platform to show them the risks they might be inclined to write.

They also are seeing demand from carriers on how they can prevent unwanted flood risk from leaking into their portfolios.

“Because most of them don’t have any flood claims experience and they need to start somewhere,” Nielsen said.


Another area that is producing changes that should make flood risk more palatable for carriers is federal and state regulation.


Perhaps with the best intentions, the U.S. Congress passed in 2012 the Biggert-Waters Act, which was intended to make it easier for private sector carriers to write insurance coverage independent of the National Flood Insurance Program.

But industry observers say it had the opposite impact.

The act confused matters by making it less clear that a private sector policy could be used to replace a federally backed flood insurance policy.

Confused by the lack of language clarity, lenders were unwilling to accept private sector policies, which led to a chilling effect on private sector flood coverage in both commercial and personal lines.

There was also political pushback against some of the act’s other provisions, chiefly that the NFIP start charging rates that are more actuarially sound.
Politicians from states with significant flood exposures succeeded in weakening Biggert-Waters, resulting in legislation in 2014 that allowed homeowners to pass on subsidized insurance rates to purchasers when they sold their homes.

According to a report by Deloitte, the six states with the greatest number of flood claims, are — in descending order — Louisiana, Texas, New Jersey, New York, Florida and Mississippi.

Florida lawmakers have since passed a law that makes it clear that a standard policy can replace an NFIP policy. Legislation has also been launched in Washington, D.C. to clarify the intent of Biggert-Waters.


Don Griffin, vice president, Property Casualty Insurers Association of America (PCIAA)

“The idea is to fix the wording in Biggert-Waters to clarify the section in that legislation that would encourage lenders to accept private flood insurance as a way to get private insurance more into the business and not discourage it,” said Don Griffin, a Chicago-based vice president with the Property Casualty Insurers Association of America (PCIAA).

As to the private sector’s capacity to provide that coverage more efficiently than the public sector, Griffin had this to say:

“We saw the insurance industry sustain $62 billion in losses after Katrina-Wilma-Rita in 2005 and pay those out without too much trouble.

“We didn’t see anybody going under as we did with [Hurricane] Andrew,” he said.
“But the national flood program paid out a little more than $20 billion and it’s been in the hole ever since,” Griffin said, referring to the National Flood Insurance Program’s current debt level of $23 billion.

“We saw the industry sustain $62 billion in losses after Katrina-Wilma-Rita in 2005 and pay those out without too much trouble.”  — Don Griffin, vice president, Property Casualty Insurers Association of America

According to a Deloitte report that examined the pros and cons of more private involvement in the flood insurance marketplace, the NFIP was $20.7 billion in the red when Superstorm Sandy hit in late October of 2012.

After that storm, the NFIP had to borrow another $9.7 billion from the U.S. Treasury to pay claims, according to the Deloitte report. That left it more than $30 billion in the red.

One obstacle for the private sector that Griffin and others point to is the issue of rate. The federal government has no cost of capital, compared to the private sector insurance industry. So its rates aren’t actuarially sound, from the point of view of a private sector underwriter.

But CoreLogic’s Larsen points out that there is a significant chunk of claims that FEMA pays out that don’t fall within its 100-year flood maps. There is an opportunity there for private insurers, Larsen said.

“I think the opportunity for writing flood isn’t just relying on regulatory changes,” Larsen said.

The National Flood Insurance Program was created as a public-private partnership by Congress in 1968. Currently, according to information provided by the PCIAA, 80 of the approximately 1,300 active personal and commercial lines insurers in the U.S. act as Write Your Own, or WYO, partners to the program.


These carriers assist the program by marketing the coverage and providing claims management services, in effect acting as third-party administrators.
The PCIAA also reports that the number of carriers helping to administer the program is declining, as is the number of NFIP policies that are in force. From a peak of around 5.6 million policies in force post-Katrina, the NFIP now has about 5.2 million policies in force and that number continues to decline, according to the PCIAA.

There’s an opportunity here for the private sector, according to John Dickson, president of Advanced Insurance Coverges, a subsidiary of National Flood Services, which manages three million flood policies and $2.3 billion of flood insurance premium annually.

In July 2014, Aon bought National Flood Services to “expand its flood solutions to reach a larger client base with this growing sector,” according to Aon Affinity President and CEO Bill Vit.

Major brokerages Brown & Brown and Marsh have also purchased flood businesses within the past year.

“From our perspective, FEMA is driving private markets to the business of flood insurance by means of the surcharges and assessments that FEMA is applying to policies,” Dickson said.

“FEMA is unabashed in what their mission is,” he said. “Their mission is to shrink the NFIP program to allow more private markets to enter this space to more effectively insure home and business owners,” he said.

In an industry awash in capital, expanded flood coverage looks like a logical place to put that capital to use, Dickson said.

“This is one of the last insurance areas that is untapped from a private underwriting standpoint,” Dickson said.

“That’s what’s exciting — we believe companies that come into this space today with the most thoughtful business plans and disciplined allocation of capital are going to be poised for very long-term success,” Dickson said.


Perhaps the key obstacle for carriers and their partners to attaining the success Dickson envisions is the issue of rate.

As the PCIAA’s Griffin pointed out, the federal program, unlike the private sector, has no cost of capital and isn’t required to reserve or buy reinsurance.

Thus the premiums it charges are far less than what the private sector would require to be profitable as a first-dollar insurer.

“The risk is there, the rate isn’t,” said Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices, an industry trade group that represents surplus lines carriers.

Surplus lines carriers currently write insurance in layers above that offered by the NFIP. Kelley and his group are continuing to work to make sure that any tweaks to federal legislation on flood coverage don’t unwittingly put limits on the involvement of surplus lines carriers in flood coverage, which has been substantial and ongoing.

“The risk is there, the rate isn’t.” — Brady Kelley, executive director, National Association of Professional Surplus Lines Offices

The Government Accountability Office echoed Kelley’s sentiment in a January 2014 report, stating private sector carriers won’t write more flood risk without the freedom to charge adequate, risk-based premiums.

The Deloitte report outlined several options for a more viable partnership between the government and the private sector.

One, which it calls the “Crop Insurance Model,” would have private carriers writing more first-dollar coverage and reinsuring catastrophic levels of loss with the federal government.

The second, which Deloitte calls the “Reinsurance Model,” would involve the NFIP spreading its flood risk through the purchase of reinsurance from the private sector.

The aforementioned Biggert-Waters Act authorized that approach.


Another model categorized by Deloitte as “The Pooling Model” would set up a flood insurance pool, similar to the California Earthquake Authority, where participating insurers could sell flood insurance bundled with standard homeowners’ policies.

Mandatory coverage, requiring every homeowner to purchase flood insurance, would spread the risk even further and create such a large pool of participants that it would allow carriers to keep premiums at affordable rates, the Deloitte study authors reasoned.

Such a mandate would likely face a substantial amount of political opposition.
More granular modeling, coupled with robust risk mitigation and portfolio management, might very well support statements like that in the Deloitte report, which said flood insurance coverage “likely represents the largest potential growth opportunity in the property and casualty market.”

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]