What Hurricane Harvey teaches us about flood exposure

August 28, 2017 / 3 min read

hurricane-harvey-medium — Water, with no place to go, in a suburban Texas neighborhood. Photo by Brant Kelly via Wikimedia Commons.

Verisk’s AIR Worldwide estimates that insured losses from Hurricane Harvey’s wind and storm surge will be between $1.2 billion and $2.3 billion – and that doesn’t include the impact of ongoing flooding from the storm’s unprecedented precipitation.¹

Some of the losses are related to storm surge – with wave surges of six-to-12 feet in some coastal areas. But most of the damage will be caused by the precipitation that has followed.

Since arriving over the Texas Gulf Coast last Friday, Hurricane Harvey has been pounding the state with driving rain – with some areas recording more than 30 inches of rainfall. And it’s not over yet: An additional 10–20 inches of rain are expected between now and Friday, September 1. We’re talking about flooding in parts of the state that are outside of the 100-year and 500-year flood plain. A typical storm sewer system would never be able to handle that amount of rain at the rate it has been falling, and the ground is completely saturated.

As an industry, we should not look to the National Flood Insurance Program (NFIP) as the sole solution. The NFIP does offer coverage for both building and personal property—for example, up to $250,000 for a one- to four-family structure and $100,000 for its contents. That coverage, though, is limited and doesn’t cover a number of exposures that consumers face. Exclusions include basements, which although most susceptible to flooding, are not covered; temporary living expenses; and damage outside the home (such as septic systems, wells, retaining walls, and decks). And there's only limited coverage for costs to comply with revised building ordinances.

Drone footage of Bayside, Texas neighborhood, shot by Geomni, a Verisk Analytics business, on August 26, 2017, shows damage caused by Hurricane Harvey to houses and a cotton gin. ©2017 Geomni. All rights reserved.

What’s more, the NFIP, which has been providing flood insurance for nearly half a century, is more than $25 billion in debt, primarily due to large payouts from Hurricane Katrina and Superstorm Sandy. With the NFIP up for reauthorization this year (September 30, 2017), Congress and many insurers are hoping to see the program reformed and the flood insurance market revitalized.

Why private industry action is needed

Hurricanes such as Harvey demonstrate exactly why private industry should be providing flood insurance. Private insurance is, at its core, meant to cover catastrophic events for policyholders. Many people, as we will find in the coming months, won't have NFIP coverage, or any coverage at all, to cover their losses. Consumers, industries, and municipalities at risk of sustaining great financial hardship will want to know why solutions to purchase insurance that would protect them in this type of event are so limited. That’s why we must find new ways to protect against known loss exposures or to mitigate the exposure through insurance.

I predict Harvey is going to do a few things to the marketplace. There will be a serious outcry from consumers to make new insurance solutions available to mitigate financial losses during an extreme event. That in turn may push Congress to include the Private Flood Insurance Market Development Act of 2017 (S.1679 and H.R. 1422) within the NFIP reauthorization. On the commercial side, many carriers will be looking for the best analytics to help them with accumulation management and overall risk acceptability metrics.

References

1. Note that these estimates do not include the impact of the ongoing flooding from Hurricane Harvey’s unprecedented precipitation. Loss estimates are based on the National Hurricane Center’s 4:00 a.m. CDT, Sunday, August 27, advisory and do not contemplate Harvey’s latest forecast track, which suggests a second landfall near Houston later this week at tropical storm strength. Should AIR determine that estimated wind and storm surge losses are significantly different from those currently released, AIR will communicate its plans for re-modeling the losses.