Property & Casualty Insight Staying Above Water: Strategies to Mitigate High Cost of Flooding

Across many parts of the country, unrestrained property development in flood-prone areas is accelerating faster than flood mitigation efforts. The result is more people and properties each year experience the costly toll of flooding.

According to the Insurance Information Institute, flooding is the most common and costly natural disaster in the United States, causing an average of $50 billion in economic losses each year. The heavy rains which inundated Texas, Oklahoma, and other Southern Plains states during the first half of 2015, and the recent deadly flash floods in Utah, triggered by thunderstorms, are stark examples of recent flood devastation Habitational properties are frequently the most noticeable victims of flood. For owners and managers of real estate properties, flooding can result in significant out-of-pocket costs since standard commercial property insurance policies are not usually structured to

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cover damages from flood. Meanwhile, those who purchase flood insurance through the National Flood Insurance Program and from private excess carriers frequently face underinsured exposures because they fail to properly review and structure the policies and coverage terms to match their unique circumstances. Following are four flood-related challenges that businesses face and the solutions USI has developed, leveraging our USI ONE™ process, to help clients reduce the financial impact of flooding.

Changes to Flood Zones during Policy Year Changes to flood zones during the course of a policy year can create underinsured exposure for business. The financial impact of such changes typically surfaces in two areas:

� Reduced flood coverage due to inadequate limit

� Increased deductible for High Hazard Flood areas

Staying on top of flood zone changes requires a diligent and experienced risk consultant with proven safeguards.

For example, USI has developed a comprehensive process which includes:

� Identifying the flood zone per location

� Providing definitive location identification by liaising with property carrier and reviewing the property policy

� Negotiating policy language so that if flood zone changes, coverage will not change

� Reviewing client exposure and appropriate limit frequently

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This process proved instrumental for several USI real estate clients when floods swept across a number of Southern states in the first half of the year. In one specific case, a new client in Central Texas suffered damage to buildings that were assumed to be outside of the most hazardous flood zones. This client, not aware that flood maps had been adjusted during the policy year, realized several of its properties were deemed to be in hazardous zones. Meanwhile, the company’s previous property coverage included only $1 million of Hazardous Flood Zone coverage.

After reviewing the updated flood zone data with the client, USI recommended higher limits for the property locations based on the exposure. The updated coverage placed by USI addressed a $2.5 million potential coverage gap. In addition, USI modified the policy language to eliminate the carrier’s ability to reduce coverage if flood zones changed during the policy year.

Reduced Coverage Due to Broad Definition of Flood A broad definition of flood sometimes allows certain non-flood events to be classified as flood, potentially reducing coverage and increasing the applicable deductible for insureds. For example. An off-the-shelf policy may contain some or all of the following broad definitions of flood:

� Surface water, underground water, waves, tides, tidal waves, tsunamis, overflow of any body of water, or their spray, all whether driven by wind or not

� Mudslide or mudflow

� Release of water impounded by a dam

� Water or sewage which backs up through sewers, drains or sumps

� All, whether naturally occurring or due to man- made or other artificial causes

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To analyze our client’s business issues and challenges, our property & casualty team leverages USI ONE™, a fundamentally different approach to risk management. USI ONE integrates proprietary business analytics with a network of local and national technical experts in a team based consultative planning process to evaluate the client’s risk profile and identify targeted solutions. Clients then receive tailored recommendations for improving their total cost of risk.

A recent example of this is when USI reviewed a client’s property policy which contained a very broad definition of flood to include the back up of sewers and drains. USI negotiated the narrowing of the flood definition so that only defined flood events would incur a higher deductible and lower limit. Subsequently, when the client suffered losses from a non-flood-related sewer backup, the policy language improvement reduced the applicable deductible from $250,000 to $10,000, saving the company $240,000 in underinsured loss.

Language Excluding Interior Water Damage Certain policies exclude losses from interior water damage following severe storms or heavy rains. This wind driven rain coverage exclusion typically occurs when proof of exterior damage is lacking. Drawing on decades of experience with such incidents, USI has developed a process that involves reviewing property policies to remove this exclusionary language.

Properly Quantifying Flood Risks and Setting Limits Proper risk quantification and limit adjustment for assets exposed to flood events is an essential aspect of flood risk mitigation. At USI, risk consultants perform actuarial analysis, using the AIR Worldwide modeling platform, to provide an estimate of the potential cost of damage from flood. The process allows for a better understanding of the coverage and pricing needed. The modeling software has been used to help many clients. For example, in one case, USI reviewed a property program

The broad definitions mean many types of water damage situations qualify as flood. For its clients, USI insists on this narrow flood definition: “The rising and overflowing of a body of water onto normally dry land.” This straightforward language can have a significant financial impact for clients.

for a new client and determined that its exposure was approximately $5 million for a 1-in-250 year event. Working closely with the client, it was agreed that purchasing $5 million in High Hazard Flood coverage was a prudent risk management strategy. The newly acquired limit provided crucial coverage when the company subsequently sustained flood losses, but was able to obtain protection for a previously uncovered exposure of $2.5 million.

The flood solutions discussed here represents a few of USI’s offerings to real estate clients. It’s important to note there is no one-size-fits-all solution so understanding a client’s specific circumstances is crucial to identifying the right mix of solutions needed. To learn more about the solutions discussed here and the USI ONE Advantage® contact a USI consultant.

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