Though the U.S. Congress has agreed to a short-term extension of the National Flood Insurance Plan (NFIP) in the wake of repeated hurricanes, any long-term solution to the troubled federal program will likely need private flood insurers to take on more risk, a new AM Best report outlined.

The Best’s Market Segment Report, “Temporary Extension Protects NFIP Through Hurricane Season, Longer-Term View Is More Clouded,” indicated the shift of the U.S. population to coastal areas has resulted in the large-scale construction of residential and commercial structures in these areas.

“This has expanded the exposures to potential flooding at the same time flooding has become more intense and devastating to these areas than originally contemplated,” the report added.

The NFIP’s Risk Rating 2.0 was designed to address pricing shortfalls and better evaluate adequate risk charge for each specific property, the program still carries a significant debt of nearly $21 billion.

While the NFIP policy count has declined, attributable partly to affordability issues around federal flood coverage under the new rating plan, private flood insurers have shown some willingness to accept flood risk, but the increase in take-up to date has been minimal.

“As pricing for NFIP increases, premiums may become more adequate relative to the risks, but private flood insurance also may become more competitive, further spreading the risk,” said David Blades, associate director, Industry Research and Analytics. “Whether private insurers have the appetite for additional flood risk remains to be seen.”

According to the report, private flood insurers, which represent approximately a third of all direct premium written for flood insurance, have generated superior results than writers of NFIP policies, recording a combined ratio in 2023 of 32.3 compared with 90.2 for the federal flood line.

From 2020 through 2022, private insurers wrote a growing portion of the overall flood market, but that growth stalled in 2023.

In Florida and in other states prone to hurricanes, the share of flood insurance purchased in the private market is even lower than the national average, the report noted.

“The slow growth could reflect private insurers’ unwillingness to write more due to increasingly unpredictable weather, or perhaps hesitation from insureds to switch to privately underwritten flood insurance,” said Christopher Graham, senior industry analyst, AM Best. “However, without the NFIP, there would be a large void in the flood insurance market – one that private flood insurers do not appear eager to fill at this point.”