Our latest installment of the AAIS Webinar Series featuring AAIS Partner, reThought Flood, explored the innovative approaches to enhance flood insurance coverage and profitability while addressing the challenges faced by the market. Speakers highlighted the long-standing gap in flood protection and the urgent need for change, emphasizing the importance of education, mitigation, and accurate underwriting to make flood insurance sustainable and profitable. They also discussed how reThought Flood’s AI technology can more accurately predict risks. John Kadous, Vice President of Products at AAIS, led the discussion with Cory Isaacson, Chief Executive Officer of reThought Flood, and Derek Lynch, Chief Underwriting Officer of reThought Flood.
The Flaws in Traditional Rating Methods
Lynch explained that traditional flood insurance rating has historically relied on FEMA (Federal Emergency Management Agency) flood zones, which categorize areas into low and high-risk zones. “In the market today, it's largely been zone-based. FEMA flood zones represent about three-quarters of the market,” he noted. However, this approach has significant limitations. “About 25% to 30% of FEMA claims come from areas outside these high-risk zones,” he pointed out. This indicates that many properties at risk of flooding may be overlooked due to their classification. “The Congressional Budget Office estimated that in 2020, 40% to 50% of flood damage occurred outside special flood hazard areas,” Lynch further elaborated. He explained that while NFIP (National Flood Insurance Program) created flood zones, they have moved away from using them in their rating methodology. “It seems reasonable that probably everyone else should consider not using them as well,” he stated, urging the industry to rethink traditional methods.
The Role of Catastrophe Models
In a market saturated with outdated methods, Lynch emphasized the importance of catastrophe (cat) models for predicting flood risks. “Cat models build out simulated possible futures,” he said, explaining how they analyze various scenarios to assess potential damage. They consider factors like storm strength, geographical location, and even tide levels to generate a more comprehensive view of risk.
However, he cautioned that no single model is sufficient to capture the complexities of flood risk. “Every model has its strengths and weaknesses,” Lynch remarked. The need for multiple viewpoints is crucial for a well-rounded assessment. “Those that take it further, often professional consultants and large reinsurers, will use multiple models. They may average the results, which is potentially dangerous,” he noted.
Understanding and Distinguishing Flood Damage
A significant challenge in flood insurance is the difficulty in separating flood damage from other storm-related damages, such as wind or tornado damage. “The cat models do the heavy lifting on that,” Lynch explained, noting that simulations help clarify what happened during an event. Yet, in the real world, distinguishing these damages can be problematic because of the ambiguity. “If the building's not there anymore, did it get blown away, or did it get washed away?” he questioned. Despite these challenges, Lynch acknowledged that rainfall-driven floods are generally easier to assess. “Rainfall is typically a lot easier to separate out,” he stated. Understanding these distinctions is vital for accurate claims projections.
Leveraging AI for Improved Predictions
To address the limitations of traditional models, the webinar introduced an innovative AI technology developed by reThought Flood. “We used our AI technology to focus on this problem, not to replace catastrophe models, but to make them better,” Isaacson explained. The reThought team applied a bottom-up approach, analyzing detailed information on over 100 million buildings in the U.S. This method offers a more granular view of risk compared to traditional top-down models that assess geographical footprints. Lynch elaborated, stating that their approach helps identify strengths and weaknesses of various models. “We use our technology to develop our own specific view of each building and then we can roll that up to a policy, a portfolio, a state, or a country view,” he said. This innovation enhances the accuracy of damage predictions and ensures that rates are sustainable and profitable.
Closing the Coverage Gap
Despite advancements in technology and modeling, Lynch warned that having the best technology is not enough; product coverage is really important. He described the challenges faced by policyholders, particularly with federal programs like NFIP, which often lack adequate coverage for secondary dwellings, basement contents, and additional living expenses. “If someone buys a flood insurance policy, has a loss, and finds that much of it is not covered, that would be horrible,” Isaacson noted. He and Lynch underscored the critical role of education in closing the flood protection gap, particularly the need for property owners to understand the risks and potential for loss. “Unfortunately, flood is one of the weakest parts of education for insurance agents. We really need to provide them not only with education but also with the tools for them to help educate others,” Lynch stated.
Community Engagement and Awareness
Isaacson and Lynch highlighted that community involvement is crucial for increasing flood insurance uptake. “Communities need to educate their populations about the risks they face,” Isaacson stressed. “Two-thirds of flood losses are currently uninsured, and around 90% of the country lacks flood coverage.” They encouraged collaboration with communities to disseminate information and promote attainable mitigation measures. “Something like backflow preventers can help mitigate risks without requiring significant structural changes,” Lynch suggested, advocating for educational initiatives that inform property owners about effective, low-cost mitigation strategies.
To view the full webinar, click on the video above.
Questions? Please reach out to any of the featured speakers through the contact information below.
John Kadous
Vice President of Products – AAIS
Cory Isaacson
Chief Executive Officer – reThought Flood
cory.isaacson@rethoughtinsurance.com
Derek Lynch
Chief Underwriting Officer – reThought Flood
