Filed Under:Markets, Commercial Lines

Significant Innovations in Flood Insurance Coverage Since Superstorm Sandy

(AP Photo/Alex Brandon)
(AP Photo/Alex Brandon)

In the aftermath of Superstorm Sandy, many corporate risk managers whose organizations had experienced a flood loss found their companies facing a new exposure. Because the financial limits of their existing insurance policies were exhausted, they were on the hook for additional financial losses in the event of another flood.

Following Sandy’s catastrophic losses, many insureds were unable to access additional capacity, or were forced to reinstate limits of existing policies at much higher costs, stricter coverage terms or substantial increases in deductibles. One year removed from Sandy’s destruction, this threat continues. Massive flooding has also devastated the cities of Calgary and Toronto in Canada, as well as Boulder, Colorado, providing a stark reminder of the need for broad property insurance protection.

For businesses experiencing losses caused by severe flooding, financial impacts come from multiple sources — from the deductibles they pay, the vertical shares of risk they absorb in the core program and the risks they assume above the insured limits of the program. The potential inability to reinstate much-needed insurance limits is an added financial strain that can occur after a flood loss like Superstorm Sandy. Insureds may have very little to no insurance protection remaining until their property policies are renewed, and even then they may not be able to acquire the same limits as before.

As the insurance market’s reaction after Superstorm Sandy demonstrated, once the financial limits of protection afforded by the property insurance policy are exhausted or have eroded, the insured may experience difficulty reinstating these limits to the previous levels of protection immediately or even upon renewal of their policy.

Reduction in coverage after a large catastrophic event is not a new phenomenon, and should not come as a surprise to risk managers. Before Superstorm Sandy, many carriers provided large flood limits in a perceived low hazard flood zone. This proved to be a misstep, given the substantial concentration of risks in Manhattan that all were subject to correlated losses.

Following Superstorm Sandy, this practice was unsustainable. One important improvement in coverage is the availability of flood reinstatement coverage, which provides insurance above the remaining limits of protection in the underlying property insurance policy. This policy can be customized to each organization’s specific risk profile and risk appetite. Risk managers have the option to buy additional high hazard flood insurance if the current coverage is sub-limited upon renewal, or if the high-hazard flood deductible in the primary program has dramatically increased. The coverage terms, conditions and premium charged are based on each insured’s high-hazard flooding exposures.

Additionally, in cases where a company building may be financed through a bank, flood limit reinstatement insurance provides an additional layer of financial protection that can assist in attaining lower interest rates at refinancing. In most cases, the lending institution bank may request the borrower’s proof of insurance as part of the bank’s due diligence process and as a condition for obtaining the loan. If the certificate or evidence of insurance indicates $5 million of flood loss protection on a building worth five times that amount, the chance of obtaining a more favorable loan is greatly reduced, if not eliminated in its entirety.

Flood reinstatement insurance specifically addresses the dilemma faced by some risk managers in the aftermath of Superstorm Sandy—inadequate insurance capacity to absorb their remaining exposure to weather-related flood risks. When extreme rainfall deluged Boulder, Colorado in September 2013, drenching some regions with at least 21 inches of rain—more than the average for an entire year—company risk managers in the affected areas had immediate access to flood loss reinstatement limits.

Flood reinstatement insurance comes at a time of great need, providing additional insurance above the remaining limits of protection in the underlying property insurance policy. Risk managers, many of whom were unable to access additional insurance capacity in the wake of Superstorm Sandy, now have the option to purchase additional insurance prior to future events occurring to proactively manage their risk.

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