Flood risk is one of the most severe natural hazards in theUnited States, yet one of the least well-managed.

Nearly all the risk is borne by one participant,the National Flood Insurance Program (NFIP),administered by the Federal Emergency Management Agency (FEMA), anentity that doesn’t have the power to diversify its risk. Ratescharged for coverage fall short of covering the underwritten risk,pushing the NFIP debt upwards of $30 billion. However, it could betackled more effectively with a more mature insurance market, tothe benefit of both property owners and the insurance industry.

During more than 40 years of the NFIP, private insurers havemostly stayed on the sidelines of flood coverage, participatingonly in excess & surplus and supplemental flood coverage forcommercial and high-value residential properties. Slowly butsurely, however, the hurdles to private sector involvement havestarted to clear, by the combined efforts of the industry, FEMA andeven private citizens.

The new flood reform bill, H.R. 2874, is a major step forward,amending the NFIP and drawing private insurers into the floodmarket. If this bill passes the Senate, consumers could see morechoices and flexibility in purchasing insurance, with policies thatbetter reflect their needs. For insurers and underwriters this isan opportunity to extend into a profitable new sector.

Related: It’s sink or swim time for the National FloodInsurance Program

Impact on insurers

This bill works to ease the acceptance of private flood policiesby financial institutions, which will create demand for non-NFIPflood policies and enable the NFIP to move away from fixed limitson coverage for single family dwellings (currently set at $250,000for the building and $100,000 for contents). Although this willlead to increased premiums for homeowners with more valuableproperties, it will open the door for much needed private marketcompetition.

Under the proposed new law, FEMA’s claims data will have to beavailable in an open-source format. The data will provideinformation on local flood defenses, the elevation of the propertyabove the ground, and the historical propensity for flooding — allof which are key ingredients to a deeper understanding of the linkbetween flooding severity and the expected damage to aproperty.

Using the open source data, insurers will be equipped to createindividual property ratings. Catastrophe risk modelers can easilyintegrate FEMA’s claims losses into their vulnerability assessmentto create damage functions that relate the depth of flooding to theexpected loss. This will give the underwriters theconfidence in pricing risk that is lacking today.

Related: 5 things businesses can do now to prepare forhurricanes

Impact on consumers

H.R. 2874 isn’t just about opening up the market. Coveragelimits on the NFIP policies create an insurance gap for many homesin flood zones, particularly coastal properties. For instance, theaverage home value in Miami Beach is almost $500,000, which meansthat the average property is 50% uninsured if it’s only covered byan NFIP flood policy. Although a market for excess flood coverageexists, it’s a headache most consumers would like to avoid after adevastating catastrophe as it creates discontinuity in the claimsprocess.

As competition in the flood insurance market increases, policyinnovation is likely to lead to more tailored solutions forhomeowners, which could lead to limits and deductibles becomingmore flexible. For instance, consumers can opt to add specialendorsements for basements or other non-covered entities orslim down their coverage to match their risk appetite. So, as themarket grows, the opportunity for customers to negotiate customizedsolutions to meet their needs will open up as well.

Related: When is a rejected proof of loss also a denial ofthe claim?

Improve flood risk assessment

This reform is designed to elevate the quality of flood riskassessment at individual locations. To achieve this, underwritersmust ensure that they have the best tools available to beginbuilding out their portfolios. The bill gives the authority forcommunities and local governments to commission their own floodrisk studies. These studies can leverage advanced analytics in amuch more detailed way than FEMA, which has the burdensome task oftrying to map all flood zones across the entire country. Impartinglocal knowledge of flood defenses and potential inundation extentswill further improve the quality of analytics available tounderwriters.

Citizens affected by changes in flood zone determinationcurrently only have one way to make their voices heard in the riskdetermination cycle: through the appeals process. The appealsprocess is lengthy, it’s exhausting, and it’s a more reactivemeasure.

Allowing local communities to determine risk zones forthemselves gives power to citizens from step one of the process.This also encourages local communities to get some “skin in thegame” and be more proactive in managing their own neighborhoods.Through increased community involvement, flood-prone towns andcities can focus on mitigation and loss prevention in addition toflood insurance availability.

Related: NYC planners: Storm-surge barrier may come toolate

What does this mean?

While many of H.R. 2874’s provisions are aimed at improving theavailability and cost of flood insurance to the consumer, theunderlying goal is to create a public-private partnership betweenFEMA and the insurance industry. This synergy will bring aboutlong-awaited and much-needed change to the NFIP, and encouragecompetition in a growing market, allowing insurance companies thechance to start building profitable flood portfolios and givingflood-prone homeowners the coverage they need to protect themselvesand their families in the wake of catastrophe.

Related: What insurance agents need to know about winterflood risks

Matt Nielsen ([email protected]) isSenior Director, Governmental and Regulatory Affairsat RMS, a well-respectedglobal catastrophe modeling firm. Pete Dailey ([email protected]) isVice President, U.S. Flood Model Management at RMS.