Even with all our technology and the inventions that make modern life much easier than it once was; it takes just one big natural disaster to wipe all that away realizing us that, here on earth, we are still at the mercy of nature. In many countries, the month of June is considered as the beginning of summers, but in Northern America, it is the start of hurricane season.

Isn’t it terrible, as the hurricane winds have the potential force up to 110+ mph?

In the year 2017, the US has witnessed one of the devastating catastrophes that have massively destroyed many lives and businesses. This means more losses for insurers as they often pick up the tab for damages that businesses and homeowners incur.

According to the Insurance Information Institute, eight of the ten costliest hurricanes in the history of US have occurred since 2000. But, not all the losses will be insured. As of August 2016, just 15% of the 1.6 million homes, which included Houston, had flood insurance and only 28% of the homes were in “high-risk” areas for flooding.  JP Morgan said, “Insured losses from ‘Hurricane Harvey’ could be as much as $10 billion to $20 billion”.

The National Flood Insurance Program

The National Flood Insurance Program (NFIP) was initiated in the year 1968 to provide government-issued flood insurance protection in exchange for local government obligations to thorough floodplain management and disaster mitigation pains.

Over 5 million families are covered, demonstrating more than $1.2 trillion in coverage. More than, perhaps, half of these are in Texas, Florida, and Louisiana in the year 2017. In the US, Texas alone, the NFIP holds more than 240,000 policies, demonstrating more than $60 billion in coverage. Still, there is no projection of expenses under this program. Yes, the amount was large. In the history of US, this hurricane cost about $16.3 billion in expenses from the NFIP. NFIP keep their premiums low, which accurately reflect the risk that a property faces. According to a recent study, NFIP is not actuarially sound, which is impacting other insurance businesses.

Now this connects me to the next point…

Impact on Insurance Businesses

Undoubtedly, natural disasters impact insurance businesses gravely from an increased number of claim applications to higher premiums. But, the strategy of NFIP to charge lower premiums is noted as an obstacle for insurance companies. They do not collect sufficient premium income to build earmark and meet long-term expected future flood losses. NFIP is already in debt of $2.6 billion.

What are the challenges faced by Insurers due to NFIP?

• Insurers receive no incentive to underpay claims. According to WYO (Write Your Own) companies want to make sure that policyholder claimants are paid the right amount based on the rules established by Federal Emergency Management Agency (FEMA).
• Insurers are striving hard to make improvements to flood insurance system that includes: improving the customer experience with the better disclosure and bringing more efficiency to the claim handling system. This enables them to work hand-in-hand with NFIP.
• Insurers also have a risk in flood insurance. As WYO companies partner with FEMA to manage flood insurance; from educating consumers about flood coverage to claims- handling functions. Companies associated with the WYO program do not underwrite risk or make underwriting profits- they only act as an agent for federal taxpayers and are subject to strict penalties if they fail to follow FEMA’s settlement strategies.
• Insurers cannot leave NFIP at any cost because many WYOs voluntarily participate in the NFIP. Most of the WYO insurers, which write other lines of business, sell flood insurance as an accommodation to service their existing customers.
• NFIP have faced massive losses after Katrina, which increased the interest of Congress. Insurers are working with policymakers to identify solutions to reduce the burden of taxpayers since the program will be reauthorized by Congress in 2018.

What must preventive measures insurance businesses consider?

• Maintain the accuracy of your claims process; after natural calamity insurance businesses are overwhelmed with excessive claim applications. So, its suggested to reduce the number of denied claims and keep your customers contented.
• After natural calamities, avoid the credit score of the consumers who are asking for claims. Due to natural calamities, they have already lost their homes, so it’s better to avoid credit score at that moment.
• Partnering with a company for insurance outsourcing can help your business to remain competitive in the market as they run your back-office tasks during natural disasters. So, once you are back from the devastation of catastrophe you can get all your data streamlined and manage your claim documents accordingly.

Time to grow

The chairman of Lloyd’s deemed climate change to be the number-one issue for all the insurance companies globally. He said that “Climate change stands to increase insured losses from extreme events in an average year by 37% within just a decade while losses in a bad year could top $400 billion”. Hence the increasing calls for a different approach focused on disaster mitigation should be taken into consideration by the federal government. Since in the US, the severity of the weather is not just a financial cost but the emotional cost too, which have become too large to bear.