Flood insurance prices charged by private investors could potentially be lower than current prices charged by the National Flood Insurance Program (NFIP), according to a new study published by the Wharton Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania.
The NFIP, which is managed by the Federal Emergency Management Agency (FEMA), currently covers more than 5 million homes and has been renewed more than a dozen times in the past three years. At $17.8 billion in debt, however, the NFIP has been subject to intensified calls for reform.
To evaluate the conceivability of privatizing flood insurance, the Wharton Risk Center analyzed the likelihood of future catastrophic flooding – and the potential cost of providing private flood insurance – in a pilot study focusing on two flood-prone counties in Texas. Using catastrophe flood modeling conducted by CoreLogic, the researchers found that prices charged by private insurers could undercut the prices charged by the NFIP in some parts of those counties.
The analysis calculated the "actuarially fair" flood insurance premium for more than 300,000 residences in Galveston and Travis Counties. The Wharton study then compared these rates to the rates currently charged by the NFIP. Based on those estimates, the report shows in the regions analyzed that there are certain areas where average NFIP premiums are too high and other areas where they are too low.
For example, in the moderate-risk flood zone in Travis County, the NFIP's premium rates are nearly twice the rates indicated by the flood model data, on average.Â Rates in Travis County's low-risk flood zone are up to 16 times higher than those indicated by the flood model data.
In turn, the study finds that premiums that would be charged by private insurance companies might not be higher than those charged by the NFIP, even including administrative costs and cost of capital.Â
"This presents opportunities for private insurers to provide coverage in some of those areas, to complement the NFIP," says Erwann Michel-Kerjan, Risk Center managing director and study co-author. "There are several practical barriers that would need to be addressed for private insurers to sell such coverage, but if done, this could significantly increase the number of residents with proper coverage, thus reducing the need for government disaster relief.’