Two-thirds of modelled U.S. residential flood losses go uninsured, leaving millions of homeowners and the broader economy financially exposed, according to Moody’s RMS modelling.
This persistent underinsurance stems from several factors, including binary, outdated flood maps. Flood insurance is required for homes in FEMA’s Special Flood Hazard Areas (SFHAs), often tied to federally backed mortgages. But because the maps are rarely updated, many flood-prone areas remain outside these zones.
Many homeowners also mistakenly believe their standard homeowner’s policy covers flood damage. Even when flood insurance is purchased, policyholders often misunderstand coverage restrictions or face sub-limits that reduce the portion of losses covered by insurance. In addition, the cost of flood policies and a lack of understanding of potential flood risk deter many from purchasing coverage.
The National Flood Insurance Program (NFIP), administered by FEMA, is the primary source of residential flood insurance in the U.S.
However, unlike purchasing flood insurance from the private market, homeowners who require flood insurance have faced periods when NFIP coverage has not been immediately available.
As a federally funded program, the NFIP requires repeated reauthorisation, and gaps in these reauthorisations—or situations where a budget or budget extension cannot be passed—result in periodic lapses.
During a program lapse, FEMA cannot issue new NFIP policies, renew them, or increase coverage on existing ones. It leaves lenders and borrowers in compliance uncertainty, while claims on existing policies are still paid—but if a policy expires and cannot be renewed, the property owner loses federally-backed flood insurance protection. Moody’s noted that every NFIP lapse can widen the flood insurance protection gap.
According to Moody’s, this gap presents a significant opportunity for insurers and the broader market, supported by recent advances in catastrophe modelling that help carriers better understand and price flood risk.
FEMA’s Risk Rating 2.0, implemented in April 2023, offers a property-specific approach and a methodology that considers multiple flood risk factors rather than whether a property is in/out of a flood zone. This allows more granular pricing, with private flood insurance gaining traction as the market is positioned for transformation.
Because private insurers are unbound by federal appropriations, they can continue to write and renew policies even when the NFIP is unavailable, providing continuity and flexibility. Private flood insurance is increasingly becoming complementary to public programs, offering new pathways to address the evolving flood-risk landscape.
Private insurers could expand coverage to underserved regions, develop tailored products that address sub-limits and coverage gaps, and build resilience through consumer education and collaboration with regulators and communities.
About the Author
