Two-Thirds of U.S. Residential Flood Losses Go Uninsured, Moody’s RMS Finds

According to Moody’s RMS modelling, approximately two-thirds of modelled U.S. residential flood losses remain uninsured, exposing homeowners and the broader economy to significant financial risk. Flooding is identified as the most underinsured physical risk in the U.S., despite increasing frequency and severity. The low uptake of flood insurance is influenced by outdated flood maps, which often exclude flood-prone areas from federally designated Special Flood Hazard Areas (SFHAs), limiting insurance mandates tied to federally backed mortgages. Many homeowners mistakenly assume flood damage is covered under standard homeowners policies, and even when flood insurance is purchased, policy limitations and sub-limits restrict actual coverage. Additionally, the cost of flood policies and lack of risk awareness deter policy uptake. The National Flood Insurance Program (NFIP), managed by FEMA, is the predominant flood insurance provider in the U.S. However, as a federally funded program, the NFIP requires periodic reauthorization, leading to lapses that interrupt policy issuance, renewals, and coverage increases. Such lapses create compliance uncertainty for lenders and borrowers and exacerbate the flood insurance protection gap when policies expire without renewal options. Moody’s highlights that these gaps present both challenges and opportunities within the flood insurance market. Advancements in catastrophe modelling and the implementation of FEMA’s Risk Rating 2.0 in April 2023 have introduced a more nuanced, property-specific approach to flood risk assessment and pricing beyond binary flood zone designations. This shift facilitates granular pricing models and supports the growth of private flood insurance as an alternative or complement to the NFIP. Unlike the NFIP, private insurers are not subject to federal appropriation constraints and can maintain policy continuity during NFIP coverage lapses. Private flood insurers are positioned to expand coverage in underserved regions, develop products that address existing coverage gaps and sub-limits, and foster resilience through consumer education and partnerships with regulators and communities. The evolving flood-risk landscape and enhanced modelling capabilities make the private flood insurance market a critical component of U.S. risk management strategies. This ongoing market transformation has implications for insurers, regulators, mortgage lenders, and homeowners, highlighting the importance of adaptive regulatory frameworks and innovative insurance solutions. Continued collaboration and education will be vital for improving flood insurance penetration and mitigating financial exposures due to flood events.