Recent hurricane and flood activity in places like Hawaii and North Carolina have put flood insurance back on many homeowners’ radars.
When major flooding occurs, the news cycle again turns to the troubling issue regarding the gap between homeowners insurance and flood insurance. Simply put, a large number of homeowners learn too late that their homeowners insurance policies don’t cover flooding.
However, there’s also an issue with flood insurance that often goes unaddressed. When most homeowners discover they have a need for flood insurance, they go directly to the more well-known source: the National Flood Insurance Program. This federally administered program offers flood insurance across the U.S. to homeowners in need of it. Yet the NFIP is not the only show in town for flood insurance. In fact, many private flood insurance providers exist and could offer a cheaper option for homeowners facing a flood risk.
Why is private flood insurance not widely discussed?
Most homeowners want all options (especially low-cost options) on the table when it comes to insurance. But most homeowners may enter the market for flood insurance and never hear about private options because private flood insurance is still a very small portion of policies sold.
As of 2017, the private flood insurance market covered $589 million in direct-written premiums. This is a drop in the bucket compared to the NFIP’s $3.5 billion in written premiums. Yet the private market grew over 60% from 2016 to 2017, while the number of homeowners acquiring insurance through the NFIP decreased year over year.
These observations at least indicate that some consumers are finding more value in private insurance options for flood protection. But are there downsides to the private insurance market for flood insurance versus the nationally administered program?
Coverage differs between NFIP and private flood insurance market
Because the NFIP is federally administered, it comes with notable limitations in how much coverage the program offers homeowners. Those covered under an NFIP insurance policy are limited to $250,000 in coverage for residential, with nonresidential buildings limited to $500,000.
Insurers offering private flood insurance coverage, however, can offer much more. In fact, it’s far easier for homeowners to access coverage closer to or meeting the replacement cost of their homes through a private option. The NFIP maximum barely covers the typical construction costs of an average home—almost $240,000—meaning that many homes won’t be fully covered by an NFIP policy in the even its fully destroyed by a flood.
Additionally, homeowners need to consider what’s included in their coverage. For the most part, private insurance and NFIP policies are the same, save for one key difference: contents coverage. The NFIP policies will typically only cover a homeowner’s personal belongings through actual cash value. That means the NFIP insurance has more control over determining the value of an item that was lost and is more likely to shoot for the lower end.
Conversely, private insurance options can offer the option of replacement cost coverage—usually at an additional fee—instead of actual cash value. This means the insurance company provides the homeowner with the cost involved in replacing the lost items, and not just the market value of the item. So items that are harder to replace will result in a higher insurance payout to the homeowner. Of course, not all private flood insurance providers will offer replacement cost as part of the policy, but it’s far more likely to be an option on the table through private insurance versus NFIP policies.
Outside of how it values the reimbursement of your property, private flood insurance may occasionally include coverage features that the NFIP doesn’t. For example, some private policies include loss of use coverage, which covers you for the additional expenses of living somewhere else—up to coverage limits—of a flood renders your home uninhabitable.
Cost of coverage between NFIP and private insurance
How much homeowners pay for any insurance program will vary based on a number of factors, such as location. For flood insurance, elevation also plays a role in what consumers will pay. Across the board, the average cost of insurance through the NFIP is $707 per year.
A recent study, however, found that between 69% and 92% of homeowners could get cheaper rates through a private insurer. In some locations, the cost differences can be pretty dramatic. In Texas, for example, between 42% and 70% of homeowners would see private flood insurance premiums that are less than one-fifth of those available from the NFIP. Considering an average home insurance policy already costs over $2,300 in the state, affordable flood insurance could help many homeowners to get affordable comprehensive protection.
Private insurance is still highly untested
When the U.S. government created the NFIP in the 1960s, it was primarily because there were almost no options available to homeowners on the open market. Insurance companies were timid to enter the flood insurance market for good reason. Margins can be razor-thin, and a catastrophic event could mean huge losses, or worse, an inability for the insurance company to fulfill its end of the bargain.
While private insurance options are growing, the NFIP has decades of proof that it’s mostly effective at offering coverage. As a result, lenders who may require homebuyers to purchase flood insurance are more likely to trust insurance purchased through the NFIP over a private option and sometimes will require that buyers fulfill a flood insurance requirement with NFIP insurance.
Still, the reduced cost and increased coverage may make private flood insurance a more attractive offer to homeowners. Particularly for those homeowners who have higher-value homes in which coverage limitations exist, the potential to avoid being left high and dry, so to speak, could be a key selling point to switch over to the private flood insurance market.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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