Coverage of natural disasters in the United States

After Hurricane Andrew hit in 1992, which severely affected Southern Florida, causing 15.5 billion USD in losses, the sector's professionals concluded that all of their hurricane estimates were significantly undervalued.

hurricane irmaA l’époque, pour l’ensemble de l’industrie des assurances, le sinistre maximum, y compris celui que pouvait causer un cyclone, était estimé à 8 milliards USD.

At the time, for the entire insurance industry, the maximum loss, including the one that could cause a cyclone was estimated at 8 billion USD. Andrew set the record straight. After this disaster, all forecasting, pricing and loss estimation models were readjusted upwards. Insurers and reinsurers have reconsidered their coverage need. The Bermudan market and the European reinsurers are then widely solicited to support the American market lacking capacity.

Coverage of natural disasters in the U.S: Homeowner's insurance

As a general rule, the natural disaster guarantee is included in the homeowner's insurance policy. This facultative guarantee systematically rules out from its coverage the risks of earthquakes and water damage caused by floods, cyclones and hurricanes.

The standard homeowner's policy therefore only covers damage caused by wind including tornadoes, cyclones and hurricanes. The damage caused by water following a cyclone is excluded.

The pricing of this guarantee, which has an average ceiling of 100 000 USD, varies according to the type of contract, the value of the insured property and the geographical area.

Insurance against water damage, cyclones and hurricanes

high waterThe exclusion of water damage risk has been very prejudicial to hurricane victims, especially after the passage of Katrina and Rita in 2005.

Despite the frequency and severity of flood risk, few Americans are covered against this event. At the federal level, only 12% of households have specific insurance against this risk.

Individuals and companies wishing to protect themselves from damage caused by floods are required to purchase a specific coverage from an insurer or from the National Flood Insurance Program (NFIP).

In the occurrence of a natural disaster in the United States, most of the losses are covered by the Federal Emergency Management Agency (FEMA) and the NFIP program.

Premium pricing

The US market is governed by the principle of contractual freedom whereby insurance companies have complete freedom to set the amount of the contribution they deem appropriate.

This system has created inequalities between policyholders who face either refusal of coverage or exorbitant premiums. In these risk areas, premiums have consequently continued to soar.

Reinsurance of natural catastrophes in the U.S

The high volatility of natural catastrophe risk necessarily leads to an increased need for reinsurance. It was after the passage of hurricane Andrews in 1992 that foreign reinsurers, particularly those in Bermuda, made a major breakthrough on the US market. Following this extraordinary catastrophe, US insurers experienced financial difficulties caused by the major losses they had to face.

hurricanCurrently, the US reinsurance market is dominated by major European and Bermudan groups. With significant capacity, these reinsurers have specialized in the coverage of natural disaster risk.

In 2005, the occurrence year of hurricanes Katrina and Rita, that is 13 years after Andrew, most of the damage caused by natural disasters was transferred to reinsurers settled in Bermuda.

For instance, at the end of 2017, the US market reinsured and thus transferred 85 billion USD in premiums abroad, the majority of which consisted of natural catastrophe risks. At the same time, local reinsurance companies accepted 70 billion USD in premiums, including those for risk acceptances abroad. In the end, after Andrew, most of the American natural catastrophe risk is reinsured out of the United States.

The United States governmental coverage programs for natural disasters

To deal with recurring catastrophic risks, the federal government has introduced government programs to provide appropriate coverage to policyholders, individuals and companies.

The Florida Hurricane Catastrophe Fund (FHCF)

The Florida Hurricane Catastrophe Fund was established in 1993 following the occurrence of Hurricane Andrew. This disaster, which at the time caused considerable damage, led to the bankruptcy of a dozen insurance companies and caused significant financial problems to about thirty others.

The FHCF has been designed mainly to protect the insured of State Florida and provide them with insurance products at reasonable prices. Powered by Florida's direct insurance companies, the fund has been acting as a true mutual of natural catastrophe risk. Some of the claims are borne by the insurers with the fund intervening only beyond a certain threshold. In March 2019, the fund has reached a capacity of 17.3 billion USD.

The California Earthquake Authority (CEA)

california-earthquake-authority.pngThe California Earthquake Authority operates as a non-profit, publicly managed and privately funded entity. This program was established in 1996 by the California authorities following the 1994 Northridge earthquake.

Main provider of earthquake covers for the State's inhabitants, the California Authority (CEA) sells its products exclusively through private insurers, members of the program. To-date, the program has 25 member insurance companies, more than 1 million insured households. The CEA fund manages a capacity of 17 billion USD.

The National Flood Insurance Program (NFIP)

Designed by the US Congress in 1968, this program is managed at the national level by the Federal Emergency Management Agency (FEMA). It is funded by the State. The NFIP allows homeowners in local communities who are members of the program to purchase a flood risk insurance policy.

The NFIP stands as an alternative to the lack of appropriate insurance plans in many States. Premiums are set according to the degree of severity of the risk at the local level. For 2017, the average annual premium is around 700 USD. It can, however, reach thousands of dollars in high flood risk areas. The ceiling of guarantee can, meanwhile, reach the sum of 350 000 USD.

By the end of December 2017, the fund had 15.7 billion USD of capacity and 22 039 local authorities among its members. Resting on a voluntary basis, the NFIP solution unfortunately remains hardly used by all the federated States.

Despite the abundance of capacity on the insurance market, natural disasters remain underinsured in the U.S. The frequency and severity of damage from catastrophic events has increased over the years, and the associated economic and insured damage has rose on average by almost 5% annually since 1999.

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