How does private flood insurance differ from the NFIP?

What does the NFIP offer?

Launched in 1968, the NFIP is funded and backed by the federal government. It is the largest provider of flood insurance in the United States and writes over 90% of residential flood insurance policies nationwide.

Consumers can purchase NFIP policies directly from FEMA, but most obtain them through FEMA-authorized insurance carriers as part of the Write-Your-Own (WYO) program. Through the NFIP, residential property owners can purchase up to $250,000 of building property coverage, which pays to repair flood damage to homes or garages. They can also purchase personal property coverage, which pays to repair or replace damaged furniture, electronics, appliances and other belongings, up to a maximum of $100,000.

Under the NFIP, FEMA maps flood hazards throughout the United States and uses the maps to delineate flood zones based on risk levels. Flood insurance is required to obtain a federally-backed mortgage — such as those insured by the Federal Housing Authority or other government agency — for any property that is located within the Special Flood Hazard Area (SFHA), or the area with at least a 1% chance of inundation each year. It’s voluntary for everyone else — despite the fact that millions of properties facing flood risk lie outside these zones.

Private flood insurance as an alternative

Private flood insurance is required to cover at least as much as the NFIP to satisfy federally-backed lender requirements in the SFHA, though it often offers more flexibility and broader coverage options, making it an increasingly popular choice among consumers.

To start with, private insurers can go above the NFIP’s $250,000 limit for building property coverage, which is often an incentive for more expensive homes to purchase flood insurance. With recent increases in building costs due to inflation, private flood insurance is becoming the only option for more homeowners to obtain full flood insurance coverage. Private flood insurance can also include additional options such as temporary living expenses after a flood (hotel stays, restaurant meals, etc.) and coverage for personal belongings stored in the basement. When your personal belongings are damaged in a flood, private flood insurance could pay you the full cost to replace those belongings rather than only paying the depreciated cash value of the damaged items. These options are not available under the NFIP.

There’s usually a shorter waiting period for private insurance as well. The NFIP imposes a mandatory 30-day waiting period from the day of payment to the date coverage begins. By contrast, many private flood policies go into effect within two weeks or less, making them especially attractive to homeowners seeking new flood insurance during hurricane season.

Finally, some homeowners insurers offer the ability to add private flood insurance coverage to a homeowners insurance policy. This allows consumers to have a single, consistent source of coverage for their home and avoid working with multiple companies to determine if a loss was due to flood or another cause. In events like Hurricanes Sandy and Katrina, homeowners found themselves in the unfortunate position of having to wait for their claim payments until it was decided whether their flood policy or homeowners policy should cover the damages.

Drawbacks to private flood insurance include its still-limited availability in some states, depending on individual insurers, while the NFIP is accessible to all 50 states and U.S. territories. Insurance companies can also cancel or choose not to renew private flood insurance policies at any time, for many reasons — for example, if the insurer decides a property is too high-risk. On the other hand, NFIP policies generally are not canceled and continue to renew as long as the consumer pays their premium.

NFIP vs. private flood insurance: What you need to know

Until recently, mortgage lenders could require homeowners in high-risk flood zones to buy flood insurance through the NFIP, which discouraged many private insurance companies from entering that segment of the market. But this obstacle was largely removed in 2019, when federal regulators allowed most lenders to accept private flood insurance as long as the coverage was “at least as broad” as that offered by the NFIP. Federal Housing Authority (FHA) loans do not currently accept private flood insurance to satisfy insurance requirements.

In an even more recent development, the NFIP introduced a new pricing methodology that aims to more accurately reflect the unique flood risk of each property, take into account catastrophic modeling related to climate change, and help reduce the federal program’s $20 billion deficit. The new rating system, which went into effect for all new NFIP policies written as of October 1, 2021, will raise premiums for some of its 5 million policyholders, which may cause more insurance companies to offer flood coverage to consumers looking for price and coverage alternatives to the NFIP.

With an increasing array of options available, consumers seeking flood insurance will need to shop around to find the best rate and coverage options for them, whether through the NFIP or a private insurance carrier. Ideally, the growing number of private flood insurance policies available, as well as the overhaul of the NFIP to bring it more in line with the real risk homeowners face, will combine to increase the take-up rate for flood insurance, as more Americans seek to protect themselves and their property from the potentially devastating impact of a flood event.

David Evans

David D. Evans is a principal and consulting actuary in Milliman’s Property & Casualty practice and a member of the American Academy of Actuaries Extreme Events and Property Lines Committee. He has extensive experience in catastrophic risk analyses, including the use of predictive modeling and catastrophe modeling to analyze risk for floods, wildfires, hurricane winds, severe convective storms, winter storms, and earthquakes.