Regular floods, whether due to hurricanes or simply heavy rainfall, are wreaking havoc in the southern states of the US and national flood-insurance schemes can’t keep up. Now Florida is providing a test case for the development of a private residential flood-insurance market

Insurers, climate scientists and catastrophe risk modellers had their eyes on the US state of Louisiana in the summer of 2016, where more than 7 trillion gallons of rain fell in little more than a week.

The flooding that followed was the worst natural disaster to hit the US since Hurricane Sandy in 2012, costing at least a dozen lives and damaging more than 110,000 homes. Only a fraction of those houses were insured against flood damage.

Safety is only relative

Residents in neighbouring Florida – where there’s no such thing as a flood-free zone – knew they could not relax either. And they were proven right when Hermine became the first hurricane to make landfall in Florida since Wilma in 2005. Recently they were hit again when Hurricane Matthew pounded the coastline.

Florida is vulnerable to extreme weather every day of the year. Even those who live inland, well away from the ocean – and who might assume they run a very low to zero risk of storm surge following a hurricane – aren’t immune to the impact of high rainfall.

“Florida’s homeowners may have let down their guard somewhat with such a long gap between hurricanes, but flooding really is an omnipresent risk for them,” says Nancy Watkins, a San Francisco-based principal at Milliman, an independent actuarial service provider.

A flood could be caused by anything from torrential rainfall like that seen in Louisiana, to leaves blocking a storm drain, to a sewer pipe breaking near your house. Some of these events won’t be covered by a traditional homeowner’s insurance policy. They won’t all be covered by the US government’s regular National Flood Insurance Program (NFIP) unless the flood involves at least two acres of land and two separate properties. Moreover, NFIP policies cover damage to a total of $250,000 (£190,000): for many homeowners such coverage has long been inadequate.

Climate change again the catalyst

Even as homeowners pay ever-higher premiums for NFIP protection, climate change means that Florida’s citizens have increasingly to worry about the risk of flood. The low-lying state is seen as ground zero for climate change risk – higher sea levels, more intense rainfall and stronger hurricanes.

One organisation, Climate Central, a nonprofit news organisation focused on climate science, suggests there’s a 15 per cent chance that a flood in South Florida could reach more than four feet above the current high-tide mark by 2050.

There is a lot at stake: Florida has been growing so rapidly that it recently became the third most populous state in the US, overtaking New York, while Miami is one of the country’s wealthiest cities. AIR Worldwide, a catastrophe risk modelling firm, estimates there is $2.9 trillion of insured property at risk in the state.

Market transformation

Hurricane Hermine will have heightened awareness of the need for flood insurance in Florida, just as the state is in the early stages of transforming the market for the product. Thanks to a series of developments that might have been unthinkable only a few years ago, Florida’s state legislature, the US Congress and the insurance industry are making the state a test case for the development of a private residential flood-insurance market.

Individual homeowners and even real-estate agents who think only of NFIP policies have been slow to take note. Since 2014, however, Florida has encouraged private insurers to compete against the NFIP, something that new developments in risk modelling is making easier with every month that passes. “The tools that I would have needed to price risk properly didn’t even exist a few years ago,” says Matt Chamberlain, a principal at Milliman.

That’s because teams at firms such as Risk Management Solutions (RMS) are still rolling out new models that will allow insurers to map the risk of flooding on a remarkably granular scale. Once, the NFIP might have evaluated this at a state, city or county level, and looked at a home’s proximity to the ocean, for instance. New models will be so precise that they will establish different risk levels for one property relative to the one next door, based on its topography.

“Analysing the Mississippi’s flood basin is undertaking a task that is geographically larger than analysing many countries in Europe, and you have to do it with a very high level of precision, understanding just how the water will get into the river system,” explains Matthew Nielsen, global head of regulatory affairs at RMS. “Even if a house isn’t in a designated flood system, one or two feet of difference in elevation may make all the difference in terms of its risk – and its outcome.”

Stagnation in the Senate

A number of catastrophe risk modelling firms like RMS are racing to complete the intensive process of capturing and verifying all this data and building models on which insurers developing products for the still embryonic Florida market can rely.

The advent of these new models, says Milliman’s Ms Watkins, means private insurers will be able to offer a wider range of products with more confidence. And a number of players are testing new products.

For now, it’s the real-estate industry that is watching developments in this area most closely. Some argue that the solution doesn’t lie only in insurance, but in new and better design that drives down the flood risk overall.

“Communities are doing more to identify infrastructure projects that can mitigate flooding issues,” says David Martin, president of Terra Group, a Miami-based real-estate development firm. “Some areas are investing in storm management systems upgrades, for instance; then there is the Arch Creek Basin, where the county is moving an entire community in a flood-prone area to affordable housing in surrounding neighbourhoods.” Mr Martin points to Rotterdam’s Water Square, an innovative design that combines urban leisure space with water storage areas to cope with rainwater when it threatens the low-lying delta city. He see it as an example of the kind of venture that Florida could emulate, and that could dramatically reshape the risk maps that RMS and other catastrophe modellers are busily drawing up now.

But the need for flood insurance won’t go away. With a bill that would open up private flood-insurance options nationwide stuck in the US Senate – in spite of having been passed unanimously by members of Congress in May – as the 2016 hurricane season draws to a close, all eyes will turn back to Florida and its tentative foray into this area.

This content was produced by FT², the advertising department of the Financial Times, in collaboration with Milliman.