With Hurricane Michael boring down on the Florida panhandle as a Category 4 storm with maximum sustained winds of 145 mph, market watchers are concerned about homeowners in its destructive path.
Ironically, the National Flood Insurance Program is underwater by more than $20 billion, and for many it's an option that they rely on. Recognizing a niche with vast opportunity, start-ups like Neptune Flood are entering the market with a big-data approach to bring some much-needed competition to what critics within the industry consider a national disaster: the NFIP itself. The insurtech says its advanced mapping and remote sensing technologies allow it to better assess the risk of flooding and offer savings for consumers.
The National Flood Insurance Program was established in 1968. It's a government-run program that fills the void in standard homeowners' policies that may exclude storm surge and flooding that can cause catastrophic damage.
"Essentially, it's Obamacare for flooding decades before Obamacare was created for health insurance," said Robert Moore, a senior policy analyst with the Natural Resources Defense Council and expert in flooding in climate change.
The program creates flood maps to determine what homes around the country are at-risk for floods, it sets rules for building on the coast, and, perhaps most significantly, it requires flood insurance for anyone the government determines has at least a 1 percent chance of flooding in a given year and offers its own policies for sale. Any homeowner with a federally backed home mortgage is required to buy additional flood coverage if they are in a designated high-risk area, but it is optional for everyone else. As a result, many consumers are unprepared if a disaster strikes.
The NFIP has generally been successful over the years at its goal of expanding flood insurance availability, Moore said, but now, "The program is broken on just about every level."
It needs to be reauthorized by the federal government every five years and hits that mark next month. Climate change had made its problems far worse by increasing the frequency and magnitude of floods, Moore said, which the NFIP was not built to handle. Their flood maps are out of date almost as soon as new ones are released, he said, and its not taking in even close to as much money as its giving out.
The program has borrowed almost $40 billion from the government since Hurricane Katrina in 2005, Moore said, as the income it generates from premiums can't keep up with the amount of major flood events. Its current debt on the books is $20.5 billion; the government forgave another $16 billion in debt. Since 2004, the program has borrowed $39.4 billion from the Treasury and repaid just $2.82 billion of that principle, according to the Insurance Journal. The Congressional Budget Office projects the program should be expected to lose, on average, about $1.4 billion a year for the foreseeable future.
"You could even say they're deep underwater and getting deeper," Moore said.
Expansion of private insurers in the market is a "no-brainer," said Jim Albert, CEO of Neptune Flood, which was just named to the CNBC Upstart 100 list of promising, early stage start-ups.
"The NFIP is a great program because it provided a flood option to people who didn't have it, but what it should be is an insurer of last resort," Albert said. "It's not a great taxpayer solution."
Lynne Yeates McChristian, a spokesperson for the Insurance Information Institute and a risk-management and insurance instructor at Florida State University, said the private market is more equipped to offer better, and also more inexpensive, flood insurance.
"You try to envision what losses are going to be and price it appropriately because you have to have the money in advance to pay out claims," she said. "It doesn't work that way with the federal government. That's why they're billions of dollars in debt with this program."
The American private flood insurance market grew by more than half last year to reach 15 percent of the total. Most private insurers — such as Liberty Mutual and Allianz — currently are used to cover high-value homes and provide coverage beyond the NFIP's limit, but companies are expanding into "first dollar" coverage, Yeates said. Neptune is the only company that Albert knows of that offers private direct-to-consumer policies.
The NFIP insures about 5 million homes in the United States, down from a peak of 5.7 million in 2009, while experts estimated there are about 40 million homes at risk. Neptune currently has about 5,000 policies in 21 states, and Albert expects it to expand to 48 states by the end of 2019. Albert also said the government is likely to take action encouraging the growth of private flood insurers like Neptune when they reauthorize the NFIP after the midterms.
But how can private insurers make money where the NFIP is losing billions?
Private companies can't function at multi-billion dollar losses the way the NFIP can, so they are forced to work smarter, Yeates said. The development of sophisticated algorithms and analytics could allow them to understand flood risk better than the government and avoid huge losses, Yeates McChristian said.
Yeates said consumers are hesitant about new companies as a rule, so the more data that insurance companies can offer to offset that uncertainty and model the future will lead to more acceptance of the new insurance model.
"The way that you can map topography to figure out where flood claims are, the science behind that has evolved so we're able to do a better job of matching and understanding the elevation and understanding how rain runoff will affect insurers," Yeates McChristian said.
Neptune has its own software to test the elevation and flood risk of every point in the United States. In contrast to the NFIP's process of sending an adjuster to a property and asking questions, potential Neptune customers can get a quote by entering an address on the website. It also offers policies beyond the NFIP max of $250,000 and will cover things the NFIP won't, such as pools, garages, basements or other external structures.
Neptune offers policies for people in all zones — even the most flood-prone — but Albert said even as private companies flood the market there is still a place for the NFIP as "an insurer of last resort."
A report from the University of Pennsylvania's Wharton Business School noted that some homes are at such a high, and increasing, risk of flood that premiums offered by private companies will be prohibitively high. Its likely the NFIP will remain in place for them, the report says.
The federal government's own Government Accountability Office has noted that NFIP "likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Department of the Treasury ... to cover claims from the 2005 and 2012 hurricanes or potential claims related to future catastrophic losses. ... Since the program offers rates that do not fully reflect the risk of flooding, NFIP's overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses."
While more access to flood insurance is a good thing, some say it fails to address the root of the problem.
"Simply having insurance doesn't stop your home from flooding," NRDC's Moore said. "You know, I've never seen a flood retreat when a homeowner presents their insurance policy to the waters."
Beth Woodruff, a homeowner in Ellicott City , Maryland, wasn't prepared for the voicemail she received back in 2016 while she was on vacation in upstate New York with her young son.
"You have to come home right now. Ellicott City is gone!"
"What do you mean, gone? Was it bombed?" she asked, confused.
The town had been completely obliterated by a flood, she was told, and her home was now underwater.
That was the first time her home flooded, she said, destroying her driveway and retaining wall and leaving "a sedan-size hole carved by the river in my front yard," Woodruff said. A year later the city flooded again. This time she was home with her son, and they fled the rising waters as the car-size crater formed again in her yard.
"We don't feel safe in our beds. Every time there's a storm and the creek rises quickly, we are terrified," Woodruff said.
Woodruff, who works for the Social Security Administration and is a single mother, is required through her mortgage to purchase an NFIP policy. When she tried to get her insurance money to cover the tens of thousands of dollars in damages, she was told over the phone that she wouldn't be receiving a dollar because the damages weren't within the four walls of her home.
"I was devastated. Absolutely devastated. I had no idea what I was going to do," she said. "And I was just completely shocked. You pay for flood insurance, you expect when a flood hits that you're going to be covered."
Woodruff said when she thinks about how much money she's spent since the flood, it makes her feel nauseous. She's in debt and living in a home she feels unsafe in. She feels trapped. "Every time it rains hard, I think about just walking away," she said. "I'm underwater. Nobody is going to buy my house in the flood zone."
Many homeowners covered by the NFIP often find themselves in a similar situation, Moore said.
"Flood insurance works really good for people who are at lower risk. It happens sometimes, and you'll rebuild, and hopefully you'll never file another claim. But more and more people are now living in this situation where they flood routinely," he said. "We're not helping them to only give them assistance to rebuild; we're trapping them in that home."
From 1978 to 2015, $5.5 billion was paid by the NFIP on about 30,000 homes that have been rebuilt after repeated floods. Climate change has raised the risks of massive storm and flood events — four of the 10 most significant floods in U.S. history have occurred since 2016 — and the risks are expected to continue to grow. Meanwhile, coastal development has proceeded at breakneck speed as roughly half of Americans live in coastal areas. This means communities need to look closely at taking steps beyond expanded flood insurance to address this problem, experts said.
Woodruff's community, Howard County, Maryland, seems to be doing just that.
It recently passed a flood mitigation plan that will attempt to rebuild infrastructure to redirect water flow better, will buy back some homes in flood-prone areas and that will offer loans to some who were affected by the floods. If the plan hadn't passed, Woodruff said she would have left her home and allowed it to be foreclosed.
"Private insurers aren't going to be able to turn back sea-level rise," Moore said. "They can do a lot of good things. I wish they could do that."
—Edward McKinley, special to CNBC.com