Insurance losses caused by residential housing flood events

• DOI: https://doi.org/10.1108/IJHMA-12-2020-0149
• Published date: 22 March 2021
• Date: 22 March 2021
• Pages: 277-289
• Subject Matter: Property management & built environment,Real estate & property,Housing markets
• Author: Billie Ann Brotman

Insurance losses caused by

residential housing flood events

Billie Ann Brotman

Department of Economics, Finance and Quantitative Analysis,

Coles College of Business, Kennesaw State University, Kennesaw, Georgia, USA

Abstract

Purpose –The purpose of this research studyis to determine whetherflood-damaged residences located in

the USA are remaining unrepaired because of the lack of flood insurance coverage. Unrepaired flooded

dwellings are subsequently being foreclosed with mortgage-insurance claims being paid to lenders. This

paper aims to examine if weather events that cause floodingimpact the losses suffered by mortgage insurers

and homeowners.

Design/methodology/approach –Two fully modified least squares regression models are done using

losses experienced by two mortgageinsurance companies. The AM Best insurance rating information for a

16-year period or years 2002–2017 is used to study whether the loss ratios experienced by two companies

underwriting private mortgage insurance (PMI) are statistically correlated to National Flood Insurance

Program (NFIP) claim levels. The assumption is that higher flood insurance claims are a proxy for more

severe weatherevents during a particular year whichresults in flooding that damage residences.

Findings –The NFIP claims coefficientis positive and significant for both companies being examined.This

indicates that themore serious the flooding event during a specific year,the higher the losses experienced by

the private mortgageinsurer. The R

2

results for the regressionmodels were 0.673–0.695. The income variable

has a negative coefficient which was significant. It indicates that falling income lead to rising mortgage

insurerlosses. The NFIP variable was significant with a positivecoefficient.

Research limitations/implications –The mortgage insurance industry is dominated by several

companies at any point in time. During the 16-year study period, some companies have become insolvent,

merged with other companies or recently started underwriting mortgage insurance. One company was

diversified writingmultiple lines of property insurance. There were only two insurerswith complete financial

informationfor the specified study period.

Practical implications –There are currently five mortgage insurers operating in the USA. A serious

flood event could cause the insolvency of some of these companies. This would reduce the competition

existing in the defaultinsurance market. The financial markets for real estate loansprice mortgages based on

the availabilityand the ability to secure mortgage insurance for high loan-to-valueproperties. There is federal

mortgageinsurance available for certain types of residential loans.

Social implications –There are a limited number of insurers writing floodinsurance. These companies

can pick or rejectdwellings and/or commercial properties to underwritefor insurance. The goal of phasing out

insurance through the NFIP may prove impossibleto achieve. A flood event without insurance would cause

serious financial consequencesto property owners, loan delinquencies and could depress the local economy

for years. Competition from private mortgage insurers may intensify the adverse selection already being

experienced by the NFIP. Private insurers would select the lower risk flood applications leaving the more

risky insuranceto be covered by the NFIP.

Originality/value –Prior research focused on financialvariables impacting PMI and weather factors affecting

flood insurance claims. Financial ratios published in the AM Best rating guide for the USA and Canada were used

to examine whether or not PMI losses are indirectly affected by flooding events as measured by NFIP variable.

Comparing two separate lines of insurance and their impact on each other has not been studied by prior researchers.

Keywords National Flood Insurance Program, Private mortgage insurance, Private flood insurance,

Climate change insurer returns, Privatizing national flood insurance

Paper type Research paper

Residential

housing flood

events

277

Received19 December 2020

Revised25 January 2021

Accepted29 January 2021

InternationalJournal of Housing

Marketsand Analysis

Vol.15 No. 2, 2022

pp. 277-289

© Emerald Publishing Limited

1753-8270

DOI 10.1108/IJHMA-12-2020-0149

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