According to Moody’s RMS model, two-thirds of residential flood damage in the United States is uninsured, putting millions of homeowners and the broader economy at financial risk.
Moody’s highlights that flooding remains the most underinsured natural risk in the United States, with only a small portion of residential properties carrying flood insurance despite the increasing frequency and severity of these events.
This ongoing underinsurance stems from a variety of factors, including binary, outdated flood maps. Homes located in FEMA Special Flood Hazard Areas (SFHA) are required to purchase flood insurance, often tied to a federally backed mortgage. But because maps are rarely updated, many flood-prone areas remain outside these zones.
Many homeowners also mistakenly believe that their standard homeowners insurance covers flood damage. Even when flood insurance is purchased, policyholders often misunderstand coverage limits or face secondary limitations that reduce the portion of the policy that covers the loss. Additionally, the cost of a flood policy and a lack of understanding of potential flood risks prevent many people from purchasing insurance.
The National Flood Insurance Program (NFIP), administered by FEMA, is the primary source of residential flood insurance in the United States
However, unlike purchasing flood insurance from the private market, homeowners who need flood insurance face a period when NFIP coverage is not immediately available.
As a federally funded program, the NFIP is subject to repeated reauthorizations, and gaps between these reauthorizations (or the inability of budgets or budget extensions to pass) result in periodic lapses.
While the program is inactive, FEMA cannot issue new NFIP policies, update policies, or increase coverage of existing policies. This leaves lenders and borrowers facing compliance uncertainty while claims on existing policies will still be paid, but homeowners will lose their federally backed flood insurance protection if the policy expires and cannot be renewed. Moody’s noted that each misstep by the NFIP widens the flood insurance protection gap.
Moody’s said this gap presents significant opportunities for insurers and the wider market, with recent advances in catastrophe modeling helping insurers better understand and price flood risk.
FEMA’s Risk Rating 2.0, implemented in April 2023, provides a property-specific approach and methodology that considers multiple flood risk factors rather than whether a property is within/outside a flood zone. This allows for more granular pricing, making private flood insurance increasingly popular as the market prepares to transform.
Because private insurance companies are not subject to federal funding, they can continue to write and renew policies even if the NFIP is not available, providing continuity and flexibility. Private flood insurance increasingly complements public schemes, providing new ways to respond to the changing flood risk landscape.
Private insurers can extend coverage to underserved areas, develop customized products that address sublimits and coverage gaps, and build resilience through consumer education and collaboration with regulators and communities.
