Interest in excess flood insurance in the aftermath of Hurricane Sandy is peaking, bringing with it the potential for harder pricing as providers deal with demand increases and storm losses, industry experts say.
Patrick Small, who oversees Wells Fargo Insurance's flood insurance practice, said he suspects excess flood prices will rise for the next year to 18 months, but he said those increases will be "very geographical and very surgical." Despite awareness in the Northeastern area, interest in excess flood policies has been widespread geographically.
Patrick Fleming, an excess flood specialist for Montvale, N.J.-based Jimcor Agencies, said Sandy will have "lasting effects" on the excess flood market for three main reasons because the storm was so costly; it revealed the importance of having accurate storm surge data when underwriting coastal risks; and it created a disparity between a surging demand and the lack of availability of excess flood coverage within the market.
The top provider of excess flood coverage are underwriters at Lloyd's, Fleming said. Lloyd's has reacted to Sandy losses by restricting underwriting territories, reducing aggregate premium available in most coastal counties in the Northeast and increasing prices between 25% to 35%, he said.
Sandy has been classified by many in the insurance industry as being primarily a flood event. The storm made landfall on the evening of Oct. 29, just southwest of Atlantic City, N.J., as a post-tropical cyclone. Total insured damages from the storm are expected by RMS to be up to $25 billion, which is one of the largest estimates; however, insurers are still tallying losses.
Excess flood policies offer flood coverage on top of the policy limits set by the National Flood Insurance Program. The NFIP writes coverage on residential buildings up to $250,000 and up to $500,000 on commercial buildings. Limits on excess flood policies can reach into the millions and are written as a separate policy or bundled into a more comprehensive offering.
Norman Heinrich, president of WNC First Insurance Services, said it's difficult to estimate the size of the excess flood market because it's typically written as a surplus line. He said his company is one of the largest writers of excess flood and "we're not that big," he said. The market's annual premiums are "definitely less than $200 million and probably $100 million to $150 million at most," he said.
Privilege Underwriters Reciprocal Exchange, known as PURE, has also seen an increase in excess flood coverage interest. "Our underwriting leads in the Northeast are reporting a 10% to 20% uptick in the amount of excess flood quotes that we're doing," said Mark Galante, senior vice president of marketing and Northeast zone executive for PURE.
Interest in the excess flood market tends to gear up around the start of hurricane season and last through the end of October, but thanks to Sandy the enthusiasm has lasted, said Todd Myers, an excess flood insurance manager for San Antonio-based SWBC. Excess flood is more prevalently written on the East Coast and along the Gulf Coast, but over the years the cover has slowly migrated into the Midwest and West.
Cliff Hope, chief property underwriter for Aspen Insurance, told BestWeek recently the vast majority of Sandy flooding was storm surge, but much of the flooding occurred in areas where it wasn't expected. "About 85% of the flood zone areas were inundated. But there were another 15% of areas where we didn't expect flood but we did see flood" (Best's News Service, Jan. 23, 2013).
Small said about 30% to 35% of Wells Fargo's excess flood business production traditionally comes from the Southeast, but there is definitely an uptick in the Northeast activity following Sandy. Small said the distribution of Wells Fargo's business could become more balanced post-Sandy, but people who live in Florida or coastal South Carolina will probably "continue to be heavy consumers of flood product," he said.
Excess flood insurance is typically written in clustered pockets of high-value homes as opposed to sporadic placement in varying neighborhoods, Heinrich said. But, he said that wasn't the case with the path that Sandy took, which placed a number of high-value homes at risk.
"The southern New Jersey shore all the way up through the northern Long Island sound ... you have an awful lot of high-value homes," Heinrich said. "It's unique in that it's probably the only geographic area where you have such a extensive amount of high-value homes located in one area."
Heinrich said it could be as much as a year before people in an affected area get back on their feet and start making decisions about insurance coverages. "There will be a spike for a period of time and it can range from six to eight months to maybe a year or two," Heinrich said, noting that following Hurricane Katrina, his firm saw a "nice level of interest" in excess flood, but then people let the policies lapse after two or three years. The activity level returns with a busy hurricane season.