US Flood Insurance is in Midstream. Can European Solutions Bring Inspiration?

The situation for #floodinsurance in the USA calls for action. On one hand, the federal government, through the National Flood Insurance Program FEMA (NFIP), has historically been the primary provider of flood insurance, but now the scheme is burdened by a billion-dollar debt. One the other hand, an astonishing 6 out of 7 homes at risk of flooding remain uninsured.

The coverage gap and the challenges for current setup, signal a need for change from both policy makers, insurance sector, and insurance takers. At this crossroads, inspiration might be sought in how European nations have organized themselves in the face of increased flood risk.

Great variations in flood insurance setups

In Europe, private insurance is regarded as the first line of defense against floods with reinsurance and financial markets as means to transfer risks. Next tier is national-level measures that typically step in at major events. An additional insurance layer covering the European Union might provide additional assurance in case of catastrophic floods, but the moment the EU disaster relief remains limited (ECB 2023).

Historically, the insurance coverage for weather-related damages has varied significantly between the countries in Europe. In Italy, only a fraction of losses has been insured (see map). In Northern European nations like the Netherlands, Norway, and Denmark, however, the majority of losses during recent decades have been covered by insurance.

Direct intervention in times of crisis

The widespread damages following Bernd (July 2021) demonstrated the vulnerability of Central Europe to floods. In Germany alone, almost 200 casualties and EUR 40 billion in direct and indirect damage cost were the tragic results of the event. Of these losses, only EUR 8 billion were insured.

In response to the devasting floods, the federal government set up a EUR 30 billion relief fund to aid the reconstruction efforts. Whether or not to intervene from the national level is, hence, a political decision. (DW 2024)

Around half of all homeowners are not insured against flood damage, which is not part the standard property insurance but a voluntary add-on. It might, however, be demanded by mortgage providers making the German setup for flood insurance a ‘semi-voluntary private market’, which according to the European Central Bank is the model on most of the continent.

As floods hit again in 2024, key political voices cried for action. The prime minister of the important state of Bavaria announced that a mandatory scheme would soon be decided: In the minister’s view voluntary insurance is normally always better, but "the state cannot always simply cover the costs of the damage." (DW 2024)

Government-backing until better basis for underwriting

In the United Kingdom, a central re-insurance scheme called Flood Re has sought to make flood cover more widely available and affordable since 2016.

A fee on all property insurance policies funds the not-for-profit scheme, owned and managed by the insurance industry. In addition, insurers for whom the cost of the flood risk part of their policy climbs above a certain level may pay a price to place that part of the policy with Flood Re.

With a fixed set of fees per policy, higher risk properties will see a price which is artificially lower than the risk-based price. In consequence, the insurer can offer the customer a cross-subsidized price for the flood part of their insurance.

Flood Re targets only private homes and those with a high flood risk (return period below 75 years). It is temporary and will run for 25 years, at which point insurers are to offer policies based on actual risk to property. While self-funded by the industry, the UK government has agreed to step in with relief funding in case of costly floods (above 200-year return period)

Pooled or not?

The Nordic countries share history and many traits of how they have organized their welfare states. And while the insurance gap is relatively low across the region (see map above), the Western most countries (Iceland, Denmark, and Norway) have much greater protection rates that the two Eastern most nations (Finland and Sweden)

The three high-performers share a structure of publicly-run, pooled insurance schemes that are funded by a fire insurance fee which is mandated by mortgage providers and therefore almost universal. However, some flood types - such as cloudbursts (pluvial floods) - cannot be passed on and will typically be covered by the insurance company directly.

For Swedish and Finish property owners, the insurance penetration is lower. Here, the private insurers are left without a centralized scheme which changes the dynamics of the market and increases the coverage gap.

Besides the high rates of coverage, centralization has also produced a unique level of data and insights which is fundamental to an efficient insurance market in these times of change. In Norway, for instance, insurance data feeds local governments plan to adapt urban landscapes to climate change through the initiative “Insurance Loss Data Sharing Project for Climate-Resilient Municipalities”. Such initiatives and data repositories equip the Nordic public and insurance sectors to tackle changes in flood patterns much better than in other regions.

On the other hand, the pooled schemes have been criticized for skewing the incentives of property owners: If there is no difference between insuring a high-risk beach house and a safe property on an elevated location, people will build in the wrong places and make adapting to the future much more expensive for society at large.

European vulnerability on the rise

The US can certainly find European inspiration when tailoring its flood insurance system for current and coming needs. The private flood insurance with some re-insurance backing from self-financed, centralized solutions may balance coverage, financial sustainability and affordability concerns.

However, across the EU, differences are stark and only about a quarter of climate-related catastrophe losses are currently insured which risks being pushed even further down in the face of more extreme weather.

The insurance sector of Europe is similarly struggling to find its feet and come up with responses to the ever-increasing flood risk. This could not be highlighted any clearer than by the trend reported by Moody’s, the credit-rater, in June 2024: Re-insurers are reducing availability and increasing rates which forces European insurers to bear a larger share of weather-related claims. As reported by an industry media outlet:

“Moody’s report underscores that the increased vulnerability of European P&C insurers to weather events is a long-term issue. The industry must navigate these challenges by exploring new strategies for risk management and pricing to maintain profitability in the face of a changing climate.”

DW (2024): Germany: Who will pay for the flood damage?, https://www.dw.com/en/germany-who-will-pay-for-the-flood-damage/a-69257433

ECB (2023): Policy options to reduce the climate insurance protection gap, European Central Bank, https://www.ecb.europa.eu/pub/pdf/other/ecb.policyoptions_EIOPA~c0adae58b7.en.pdf#page=29

GWS et al (2022): Schäden der Sturzfluten und Überschwemmungen im Juli 2021 in Deutschland, https://www.prognos.com/sites/default/files/2022-07/Prognos_KlimawandelfolgenDeutschland_Detailuntersuchung%20Flut_AP2_3b_.pdf