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Year of below-average cat activity highlights need for more flood insurance

Two massive hurricanes, Matthew and Hermine, impacted parts of the U.S. in 2016 and were the first major hurricanes to make landfall in the country since 2005. While many have called it an average or below-average year for catastrophe losses, disastrous flood events provided a push for more flood insurance uptake in 2017.

"Flood season is rainy season is hurricane season," Lynne McChristian, the Florida representative for the Insurance Information Institute, said in an interview. Hurricane Matthew got people thinking about having and keeping a flood insurance policy, she said.

Florida was hammered by Hermine, a Category 1 hurricane, near Tallahassee on Sept. 2. Matthew made landfall north of Charleston, N.C., and hit the Sunshine State's middle and northeastern parts on Oct. 8. Along with other weather events, they made the 2016 Atlantic hurricane season the busiest one since 2012. Matthew caused extensive property damage and flooding and led to $729 million in losses in Florida as of Nov. 30, according to the state Office of Insurance Regulation.

The concern surrounding flood insurance policies had already surfaced in August, when disastrous floods caused by a low-pressure system that hung around Louisiana's coast hit the state, killing 13 and driving thousands of people out of their homes. The floods caused economic losses totaling $10 billion and private insured losses of at least $1 billion, Swiss Re estimated in a Dec. 15 report.

Matthew caused historic levels of flooding in North Carolina. The event underlined the disparity between what is covered by insurance and what is not, said Steve Bowen, director and meteorologist at Aon Benfield. Most people assume that homeowners insurance covers flood damage, but that is not the case, he said. Flood damage is harder to predict than wind damage, according to McChristian.

"Combine that with the fact that a flood policy has to be purchased up to 30 days in advance of the policy taking effect," she said. "You can't buy it when the floodwater starts to rise."

When the floods hit Louisiana, only 14.1% of the residents had flood insurance coverage in Lafayette, La., FEMA data showed. The situation was even worse in the state's capital, where a lower percentage of people had National Flood Insurance Program policies. But there was an uptick in parts of the Southeast and along the East Coast following the active hurricane seasons of 2004 and 2005, Bowen said. Twelve hurricanes made landfall in the U.S. that season, including Katrina, Wilma and Ike.

"People saw the images," he said in an interview. "They were very aware of the losses associated with some of these events."

The 2016 flood events could pave way for an uptick in coverage under the National Flood Insurance Program. Come September 2017, the program will be up for congressional renewal, and U.S. House Committee on Financial Services Chairman Jeb Hensarling, R-Texas, has expressed his plans to help get it reauthorized, even if it may require a bipartisan effort.

The privatization debate is not entirely new to Florida, however. In March 2016, the state House unanimously supported a bill that would let private players into the flood insurance market. But simply having the private sector write more of the risk may not guarantee that more people would purchase coverage, said Robert Muir-Wood, chief research officer at Risk Management Solutions Inc. Florida had 140 claims filed through private insurers, compared with 4,391 filed under the National Flood Insurance Program, according to the state's insurance regulation office data.

The Louisiana floods hit Assurant Inc.'s third-quarter earnings, with the insurer posting after-tax catastrophe losses of $33 million.

Meanwhile, Coastal American Insurance Co. entered the flood insurance market when it decided to offer flood insurance as an endorsement in its homeowners policies.

The year was relatively quiet, but it was a reminder that people on the East Coast and in the Southeast have been "running on borrowed time" with hurricane landfall, Bowen said.

Another weather event that affected insurers' bottom line and kept claims departments busy in 2016 was hail, said Ted Gregory, director of property claims services at Verisk Insurance Solutions. Severe thunderstorms between April 10 and April 13 damaged homes, businesses and automobiles in the Dallas-Fort Worth and San Antonio areas, causing economic losses of $3.5 billion and insured losses of $3 billion, according to Swiss Re.

The events of 2016 were not catastrophic enough to move insurance and reinsurance rates in any substantial direction, Bowen said, with no event that would "force the industry to have to start thinking about adjusting the prices." However, loss events on a par with those of 2005 and 2011 would do that, he said.