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The NFIP: Changes and opportunities

The National Flood Insurance Program (NFIP) is undergoing its first major update in 50 years. The private sector has already been involved in this update, and is likely to play an increasingly important role in the flood insurance market across the US.


Flooding is the most pervasive hazard in the United States – 90% of all natural disasters in the country involve flooding. In the US, damage from floods is not covered under a standard homeowner or renter’s policy.

Due to a lack of private flood insurance, the NFIP was created in 1968. It is a federal program, managed by the Federal Emergency Management Administration (FEMA). The program’s three main aims are to provide flood insurance, develop maps of flood hazard zones and to improve floodplain management.

In order for homeowners to get insurance through the NFIP, local governments must adhere to adequate floodplain management regulations. In turn, the NFIP is required to provide insurance to all applicants who live in participating areas. The insurance coverage amount is up to $250,000 for structural damage and $100,000 for property contents. Private insurers offer “excess” coverage, which can be bought on top of an NFIP policy. 

To manage the future exposure of the program, there is the NFIP Reinsurance Program. Risk is transferred to private reinsurance companies and capital market investors. Catastrophe bonds sit alongside traditional sources of reinsurance, and through this FEMA has an additional method to fund payment of flood claims after catastrophic flood events.

The changes

FEMA has been using risk ratings based on a methodology that was developed in the 1970s. Two factors were considered: whether properties were in a severe flood zone, and if so, their elevation within these zones. The new model, Risk Rating 2.0, uses more advanced technology.

According to FEMA, “Risk Rating 2.0 is not just a minor improvement, but a transformational leap forward”. It has been built on years of investment in flood hazard information by incorporating private sector data sets, catastrophe models and evolving actuarial science. Companies that have provided these models and data include KatRisk, CoreLogic and AIR Worldwide, a Verisk business.

Some of the factors that will be used in the new method include distance from a water source, frequency of flooding, coastal erosion, cost to rebuild and property value.

What it means

Although a more technical-based approach to risk assessment and pricing is much needed, changes to the NFIP are not without challenges. The program currently provides insurance for 5 million properties, and approximately 3.9 million of these will experience a premium increase. 200,000 properties will have a substantial increase, and the rest will see a moderate increase. A third of policyholders have an income that is less than 85% of the median income in their region, so even moderate increases may be a deterrent for some. This is a potential barrier to closing the insurance protection gap across the US.

With property value and cost to rebuild now being used to calculate policy prices, pricier homes are going to see an increase in premiums. 11% of homes will see an increase of at least $10 a month, and the majority of these are the highest value properties.

Currently, FEMA plans to implement premium changes in October 2021 for new flood insurance policies, and amend existing policies in April 2022.

What are private companies doing?

Although the NFIP was originally set up due to the lack of private insurance options, advances in data and analytics are now enabling private insurers to take on flood risks that they did not in the past. Private flood insurance may offer some advantages over the NFIP, including more flexible flood policies, integrated coverage with homeowner’s insurance, or cheaper coverage for some consumers.

Insurers want to accurately price insurance using data that isn’t limited in terms of coverage or scope. Founded in 2013, Bristol-based Fathom provides accurate flood modelling hazard data for the entire US, down to a resolution of one metre. In the InsTech London podcast episode 130, Dr Andrew Smith and Dr Oliver Wing discussed how Fathom was able to build their US flood model. According to Fathom, FEMA has been trying to build comprehensive models for years, spending over $10 billion on small scale models. Fathom has found a way to build accurate models at scale significantly more cheaply than has previously been used, allowing them to create a comprehensive US model.

Another UK-based flood modelling company, which has been providing flood data to insurers since 2011, is JBA Risk Management. The company has developed flood models that cover 99% of the world’s landmass. This experience has been used to provide new flood hazard maps and real-time modelling for US insurers. JBA can provide hazard data at a five metre resolution which is translated into flood scores to make it consumable for underwriting. We heard from Jane Toothill and Matt Reid on InsTech London podcast 136, where Matt mentioned how the lack of adequate flood insurance cover is a major part of the insurance protection gap in the US – in hurricanes Harvey and Sandy, many impacted properties had no flood insurance.

RMS, the catastrophe modelling company, provides models, data and software that are predominantly used for underwriting, managing portfolio risk and defining capital requirements. The RMS US Inland Flood High Definition Model considers hydrodynamics, multiple hazard sources, steep gradients, flood defence impacts, and individual building vulnerability. 

Providers of flood models and data are seeing a significant opportunity to provide insurers with the necessary insights into the range of potential commercial opportunities in the private flood market.


Climate change is going to continue to exacerbate flood risk – floodplains in the US are expected to grow by approximately 45% by the end of the century. Due to this increasingly important risk, FEMA is aiming to boost the number of households with flood insurance from the current 5 million to 8 million by 2022. However, changes to the NFIP may increase the insurance protection gap, leaving vulnerable homes exposed. Private insurance companies are likely to play an important role in closing this gap – and to do so, a breadth of accurate data is needed.

To learn more about companies offering flood models and data, 22 companies operating in this space are included in the InsTech London Location Intelligence report.

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