What AM Best Says
Record Economic Losses
Highlight Insurance Gap

• June 2019
• 

Heavy rains and rapid snowmelt have combined to cause catastrophic flooding in Nebraska and other states along the Missouri River, destroying homes and buildings, killing livestock, wiping out roads and bridges, and decimating millions of acres of farmland. The flooding may last for months because of additional snow that is still left to melt, particularly in the Dakotas and Minnesota. Over the past few weeks, thousands of residents of Nebraska, Iowa, Missouri, and Kansas have been forced from their homes as fast-rising water poured over levees in the region due to blizzard conditions that had dumped one to two feet of snow in some areas, in addition to excessive rainfall. Early estimates of damage to infrastructure, private property, and agriculture exceeded $1 billion and have since been increased to as much as $3 billion, with that figure expected to increase even further.

Floodwaters are expected to recede, but there is still plenty of snow left to melt in northern states so any relief felt will likely be temporary. As temperatures start to warm, the melting snow will send more water down the Missouri and Mississippi rivers and their streams. In some areas, river ice jams are exacerbating the flooding. Residents in the affected states, particularly farmowners in rural areas, must wait until the waters recede to see the full extent of the damage. Given the extent of the devastation, losses could leave many farmers without sufficient income to continue their operations.

The National Weather Service expects additional rain in the spring will prolong and expand the flooding, especially in the central and southern U.S. The National Oceanic and Atmospheric Administration's (NOAA) Ed Clark, director of the National Water Center in Tuscaloosa, Alabama has stated: “This is shaping up to be a potentially unprecedented flood season, with more than 200 million people at risk for flooding in their communities.”

While P/C insurers will bear the cost of certain claims—submerged automobiles, lost livestock (cattle), and damages to heavy farm equipment—the vast majority of the damage to homes and personal property will likely be uninsured. In all likelihood, the cost of these damages will once again be absorbed by the residents and business owners. In addition, state and local authorities will need to bear a portion of the cost to rebuild to get their communities back together.

Property/casualty insurers that are geographically concentrated in the affected Midwestern states—especially in Nebraska, Iowa, and Missouri—are more susceptible to flood and other weather-related losses. However, residential flood is usually provided by the NFIP and is excluded from standard homeowners' policies. In addition, most companies have reinsurance strategies that help manage their exposures. Most insurers do not have significant exposure to the flood peril, so we do not expect any rating pressure on these carriers.

Historically, the take-up rate for federal flood coverage in these communities has been low. Based on current National Flood Insurance Program data, fewer than 10,000 policies are in force in Nebraska for its nearly 2 million residents. The states hit hardest by these floods generally have NFIP insured rates of less than 1%, another reminder of the massive insured protection gap in the U.S. and the ineffectiveness of the current flood program. Federal flood maps are outdated in many cases, so it is likely that prospective insureds did not have a true idea of their susceptibility to potential flood losses.

The more common problem is that, unless the home is financed with a government-backed loan, the property owner is never made aware of the risk and the property's susceptibility to flood. Both of these points likely factored into the low take-up rate in Nebraska and Iowa, highlighting the importance of improved flood mapping and greater public awareness. (See chart on page 71.) These floods also remind us of the need to find a public and private solution to a program that is still more than $20 billion in debt—and growing.

With the current crop surplus and the U.S. trade war with China, low commodity prices have led many farmers to keep crops such as soybean and corn in silos in the hope that commodity prices would rise. Unfortunately, those farmers were largely unable to save those crops. Much of the product lost by these farmers is uninsured. However, private crop insurance and multiperil crop insurance (MPCI) may provide some farmers with coverage for lost revenue resulting from the inability to plant crops this year because of flooded land. Crop insurers may be on the hook to pay out because farmers may not be able to plant crops before the designated final planting date. Acres planted before the final planting date are entitled to a full yield guarantee. If crops are planted after this date, the guarantee is reduced. However, if farmers are not able to plant because of disasters, they may be entitled to compensation from crop insurance.

The United States Department of Agriculture's Risk Management Agency (RMA) manages the federal crop insurance program that provides a backstop to the MPCI. The contractual coverage is for a percentage of covered revenue for corn and soybean crops—for example, not 100%. Lost revenue from ruined crops that were in storage, however, is not covered by crop insurance.

Farm bankruptcies were already on the rise in the upper Midwest, including North Dakota. That number will now increase as farming communities deal with the extreme level of flooding. With climate change representing an ongoing threat, extreme weather events are increasingly common. For some, the extent of the flooding that has occurred and which still may occur could imperil not only their existing, grown crops but their upcoming crops as well, because the lingering water will strip topsoil and leave behind sand that could delay planting. In many cases, farmers were planning to plant seed within the next few weeks.

Flood losses to business and vehicles, including business interruption claims, will likely generate the lion's share of the insurable losses from the storms. Losses to onshore commercial and industrial properties and their contents, along with insured commercial automobiles, are expected to be substantial, especially for companies with geographic concentrations in the affected states. Business interruption claims for commercial enterprises and, to a lesser extent, additional living expenses for covered residential property owners could also drive up the loss total for which primary insurance companies, and their reinsurers, will be on the hook.

President Donald Trump has approved disaster relief for Nebraska and Iowa, making federal funds available to homeowners, renters, businesses, public entities, and select nonprofit organizations in affected counties. Missouri Governor Mike Parson declared a state of emergency, paving the way for similar actions in his state. The Midwest flooding has reached or approached a number of polluted sites in the region, including identified Superfund locations. While the spread of contaminated water is a threat, at the moment there are no related insurer liability concerns. AM Best will continue its ongoing dialogue with rated insurers and monitor developments as the situation evolves.