Less than 12 percent of U.S. homeowners have a flood insurance policy, despite the fact that flooding is the country’s most common natural disaster, said Katy Sivyer, underwriter for North America and the Caribbean at Hiscox Re & ILS.
This is why Hiscox Re & ILS launched a new U.S. personal lines flood product late last year, called FloodXtra, which aims to help its insurer partners provide their policyholders more affordable flood insurance, thereby helping to fill the flood insurance gap.
In a nutshell, Sivyer explained, Hiscox is using technology to differentiate low-to-moderate-risk locations within “a given flood zone to be able to charge a more affordable rate, which we think will increase the take-up of flood insurance.”
With the FloodXtra product, Hiscox does a bit of hand-holding for insurers that are new to the market by providing quota share arrangements and all the latest analytic technology and flood modeling.
Flood could provide massive new business opportunities, but it’s a risky business without the right tools and technological knowledge.
“At the moment, we do quota shares to help our clients get comfortable with the products. Longer term, we’d love to move it toward a catastrophe, excess-of-loss product,” she said, noting that Hiscox has spent the last four years getting comfortable with the analytics of flood models and developing a deep understanding of the flood peril.
“We’ve focused on building our understanding of floods because we consider it to be a growth area for us,” she confirmed.
But first, a deep understanding of the models is required. “You need to understand their downfalls and use them as a tool to better understand the risk — but not straight out of the box,” she said, noting that’s why clients and partners will need to spend some time to understand the peril, “which is why we offer a quota share arrangement.”
Hiscox has been asking for a 10 percent co-participation from its ceding companies in the first year. “Then over the next three years, that would move up to a 25 percent quota share as the insurer gets more comfortable, Sivyer explained.
While the quota share arrangement can provide up to a 100 percent cession to Hiscox Re, Sivyer said, client participation is preferred. The FloodXtra cover is provided as an endorsement to a homeowners policy, which is white-labeled and sold under the primary insurers’ brand and policies. By adding the cover as an endorsement, lower premiums of $100-$200 can be offered, she added.
“We always look for partners who are best in class, and we want as much alignment with those people as we can have, which is standard underwriting procedure for Hiscox,” said Bevis Tetlow, head of North American Underwriting.
Flood Model Development
It’s clear that the advent of flood models in the last four or five years has enabled Hiscox and other carriers to get into the market, but they’re not yet at the point “where you can treat them as a black box and take them straight off the shelf,” Sivyer emphasized.
Hiscox has licensed three flood models to date and partnered with a number of independent analytical experts such as remote sensing and satellite imagery companies to understand historical flood events, GIS experts to validate available flood models, and independent actuarial consultants to review its proprietary pricing algorithm to add confidence in its rating.
“We take the best bits of each model and generate our own internal understanding of flood risk,” Sivyer affirmed.
Even if one model is more accurate, her team would examine different bits of the different models “to improve our view,” she said. “It’s the same with hurricane modeling, where the models have been around for 20, 30 years and they’ve gathered a lot of data, which has helped them improve and refine the technology.”
Still, it’s very clear that one model isn’t enough because the science “and our understanding of the peril, particularly one that’s as highly granular as flood, is constantly evolving,” Sivyer said, noting that flood risk changes along with changes in the urban environment. Exacerbating the problem is the fact that flood is much harder to model than hurricanes, tornadoes and earthquakes because it’s such a localized peril. Further, she said, the computational power that’s needed to run these models, because of the size of the United States, has only become available in the last four or five years.
“Computationally, it’s so intensive that it’s been quite a challenge,” she stated.
Private Market Interest Grows
Until about five years ago, policyholders were only able to obtain homeowners flood cover from the U.S. National Flood Insurance Program (NFIP). However, with the advent of new flood models and a move by the NFIP to open the program to private markets, interest in the risk is growing.
“Last year’s hurricanes — particularly the Texas floods associated with Hurricane Harvey — have highlighted the inadequacy of flood insurance provisions in the U.S.,” said Tetlow in prepared comments when FloodXtra was launched. “The market is deregulating, and the good news for consumers is this will give them a greater choice of flood cover.”
The NFIP offers one standard premium of nearly $400 to homeowners in high-risk areas as well as those in low-to-moderate-risk areas, which have a one-in-a-100-year risk, or a 1 percent chance of a flood. It’s those low-to-moderate risks that Hiscox believes can be written at a more affordable price than is offered by the NFIP.
Currently, more than 20 percent of NFIP claims come from homes considered to be in low-to-moderate-risk flood areas, where insurance take-up is below 2 percent, said Hiscox in its October 2017 announcement of the launch of FloodXtra.
“There is a high variation of flood risk, and some locations should be paying more — such as $1,000 — and some locations should be paying a lot less because their risk and the location of that property doesn’t require a higher cover or higher premium,” Sivyer said.
FloodXtra provides a granular understanding of the risk, “so we can charge people the right amount in the right area,” she explained.
Tetlow said FloodXtra allows Hiscox’s carrier partners and ILS investors to leverage “in-house flood analytics and proprietary technology,” which will help boost U.S. homeowners’ resilience to flood.
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