Flood insurance


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Flood risk continues to be one of the most difficult perils to price for the homeowners insurance industry, and until recently many have considered it to be uninsurable. As a result, flood insurance has traditionally been offered primarily through the National Flood Insurance Program (NFIP), operated under the auspices of the Federal Emergency Management Agency (FEMA), and a few private insurers. But recent legislation, coupled with improved flood risk modeling, reinsurance and insurance market capacity—and consumer demand—are making the possibility of a private flood insurance market more viable.

More than any other catastrophic peril, flood risk varies over short distances and a successful risk classification plan needs to accurately price this risk. Milliman is one of the first companies to develop sophisticated private flood rating plans and has extensive experience addressing the challenges inherent in this work.

What we do

Milliman is at the forefront of innovation in flood insurance. Concurrent with the recent developments in flood insurance modeling and data availability, our consultants have developed independent flood rating and underwriting structures for private insurers. We have extensively reviewed storm surge catastrophe models and inland flood models and have developed a variety of approaches to the area of flood insurance rate structures. Additionally, Milliman has used predictive modeling techniques to overcome some of the limitations of catastrophe models and has used Geographic Information Systems (GIS) data to define flood territories and create rating factors that closely match price to underlying risk.

To reduce time and data needed to enter the flood arena, we have developed market baskets, which are portfolios of hypothetical risks with realistic distributions of the characteristics required for insurance pricing, catastrophe modeling, and underwriting. Market baskets are useful when designing flood rating plans, both for creating the rates and rating factors and for assessing profitability, competitiveness, and market volume. Milliman offers market baskets in numerous states along the Gulf and East Coast, and is in the process of building market baskets for all 48 states in the continental U.S. Our market baskets include the critical factors that contribute to flood risk, such as elevation, relative elevation, distance to coast, distance to river, and insurance to value.

Relative elevation measures whether a point is higher or lower than the surrounding area

Milliman is familiar with the current NFIP rating plan and has developed a rating engine that can be used to calculate NFIP premiums for a portfolio of policies based on specified rating characteristics. Further, we have extensive competitive data on homeowners premiums, which can be used to assess the premium increase to policyholders of adding a flood endorsement.

Using these tools, we can perform extensive market feasibility studies to test the competitiveness of proposed rating and underwriting alternatives and reduce the risk of new program implementation.

Modeled NFIP loss ratios by segment - Louisiana

Other capabilities

Milliman can assist with the implementation of catastrophic rating plans, including creating manuals, understanding and managing policyholder dislocation, creating GIS layers, and assisting with IT issues that may arise.

Milliman offers PinPoint, a cloud-based application program interface that takes a latitude/longitude and returns GIS-based variables in real time. This provides our customers a cost-effective alternative to the incorporation of custom GIS layers into existing systems.

Our consultants are recognized as thought leaders in flood insurance and have presented on catastrophic risk rating and flood rating at numerous industry conferences.