Addressing Flood Risk: Moody's Assessment of Insurance Gaps

Moody's Investors Service recently underscored a pressing challenge for U.S. state and local governments: the increasing risk of flooding. This risk is exacerbated by more frequent and severe flooding events, residential expansion into flood-prone areas, and insufficient insurance coverage to mitigate potential losses. As property insurance costs rise and property values decline, these governments must also invest heavily in climate-resilient infrastructure.

Moody's report singled out Louisiana, Florida, South Carolina, and Texas as states with the highest flood risk, predominantly impacting counties near the Atlantic Ocean and the Gulf of Mexico. The analysis utilized Moody's proprietary maps to evaluate flood risk across three distinct scenarios: one-in-100-year floods, one-in-500-year floods, and projected flood risks for 2050, all within current insurance conditions.

The findings revealed that fewer than 2% of U.S. counties account for 65% of the uninsured residential flood loss exposure under a one-in-100-year flood scenario. The insurance coverage gaps identified were $375 billion for the current one-in-100-year scenario, $1 trillion for the one-in-500-year model, and $472 billion for 2050 projections. Jesse Keenan from Tulane University's Center on Climate Change and Urbanism highlighted the fiscal burden on local governments due to unaddressed flood risks and the growing exposure risk in the municipal bond market as more homeowners forgo flood and windstorm insurance.

Insurance Gaps and Fiscal Implications

Insurance gaps in high-risk counties, especially along the coasts of Florida, Louisiana, South Carolina, and Texas, are significant. These gaps often exceed $5 billion under the one-in-100-year model. Moody's pointed out that extreme precipitation, as seen during the 2024 Hurricane Helene in Asheville, North Carolina, could surpass traditional models' rain level predictions.

Federal maps from the Federal Emergency Management Agency guide flood insurance requirements based on riverine flooding but frequently neglect risks from extreme weather and sea-level changes, complicating credit risk assessments. Moody's analysis concentrated on residential loss exposures, omitting commercial and governmental insurance deficits that could further influence credit risks. The report encourages the insurance industry to adopt broader and more accurate assessment models for flood risks and insurance requirements.