Why does the U.S. flood insurance gap persist, and how can private insurance transform the market?

Author: Firas Saleh, Director - Product Management, Moody's

New Moody’s RMS modeling finds that two-thirds of U.S. flood residential modeled losses go uninsured

Despite the increasing frequency and severity of flood events, such as those recently seen in New York at the end of October 2025, only a fraction of residential properties in the U.S. carry flood insurance, making flooding the most underinsured physical risk in the country.

Using Moody’s RMS modeling, we find that two-thirds of modeled U.S. residential flood losses go uninsured, leaving millions of homeowners and the broader economy financially exposed. This analysis, powered by the Moody’s RMS™ U.S. Flood HD Model and residential exposure datasets, provides a high-resolution view of flood risk nationwide.

Even in insured at-risk households, underinsurance or inadequate coverage against potential flooding losses is widely prevalent. These findings underscore a persistent and systemic protection gap in U.S. housing markets, especially in inland regions and areas outside FEMA-designated flood zones.

 

Why does the flood insurance gap persist?

Several factors contribute to this persistent underinsurance:

• Binary and backward-looking flood risk maps: The requirement for flood insurance is triggered by binary in/out criteria, typically where a homeowner with a federally backed mortgage is mandated to buy flood insurance as their property is located within the Federal Emergency Management Agency (FEMA) Special Flood Hazard Area (SFHA). Yet as the maps are rarely updated to reflect current risk, many flood-prone areas fall outside these SFHA zones.
• Misconceptions: Many homeowners mistakenly believe their standard homeowner’s policy covers flood damage.
• Sub-limits and coverage restrictions: Even when homeowners purchase flood insurance, policyholders often don’t understand coverage restrictions or face sub-limits that reduce the portion of losses covered by insurance.
• Affordability and awareness: The price of flood policies and the lack of understanding of potential flood risk deter many from purchasing insurance.

 

National Flood Insurance Program (NFIP)

With over 4.7 million residential insurance policies providing US$1.28 trillion in coverage for more than 22,700 communities across the U.S., the NFIP, administered by the Federal Emergency Management Agency (FEMA), represents the primary source of residential flood insurance coverage in the country.

Unlike purchasing flood insurance from the private market, homeowners requiring a flood policy for their properties have faced periods where NFIP coverage has not been immediately available.

As a federally funded program, the NFIP requires repeated reauthorization. Since the end of the 2017 Financial Year, the non-partisan Congressional Research Service (CRS) has stated that there have been 33 short-term NFIP reauthorizations. These gaps in program reauthorizations or situations where a budget or budget extension can’t be passed result in periodic lapses of the NFIP. This can create immediate and far-reaching consequences for the U.S. flood insurance market:

• No new or renewal policies: During a program lapse, FEMA cannot issue new NFIP policies or renew them, nor increase coverage on existing policies.
• Lender and borrower uncertainty: Lenders must continue to make flood determinations and provide notices to borrowers, but cannot require NFIP coverage during the lapse. This creates a compliance gray area and increases the risk of uninsured mortgages.
• Claims on in-force policies: Claims on existing, in-force NFIP policies are still honored during a lapse. However, if a policy expires and cannot be renewed, the property owner loses federally-backed flood insurance protection.

Based on our model findings, with two-thirds of residential flood losses uninsured, every NFIP lapse can widen this protection gap, leaving more communities vulnerable, especially with increasingly frequent and severe flooding reaching areas previously considered low-risk.

 

What are the lending and insurance risks during an NFIP lapse?

Under regulatory guidance, financial institutions are allowed to continue making loans for properties that would typically require flood insurance, even when the NFIP is unable to issue new or renewal policies. The risk burden does shift somewhat to lenders, who must still make flood determinations and provide timely, accurate notices to borrowers. Lenders must continue to comply with all other applicable flood insurance regulations to prudently manage safety, soundness, and legal risks during the lapse.

Lenders can consider private flood insurance as an alternative. This flexibility keeps real estate transactions moving but introduces additional risk: property sales in flood-prone areas may close without insurance in place, and expiring NFIP policies cannot be renewed until the program is reauthorized. As a result, more homes in at-risk areas may be left uninsured, increasing exposure for both borrowers and lenders.

With flooding accounting for nearly 90% of all natural disaster events in the U.S., the risk for lenders and homeowners amplifies when the NFIP cannot issue or renew policies.

 

Is private flood insurance the solution to closing the gap?

The persistent flood protection gap presents a significant opportunity for insurers and the broader market. Advances in catastrophe modeling, such as the Moody’s RMS U.S. Flood HD Model, help insurers to understand and price flood risk more effectively.

These tools support:

• Risk-based underwriting within and beyond Special Flood Hazard Areas (SFHAs).
• Product innovation for low-to-moderate risk zones.
• Portfolio optimization using correlated views of flood and hurricane risk.

FEMA’s Risk Rating 2.0, implemented in April 2023, offers a property-specific approach and a methodology that considers multiple flood risk factors rather than whether a property is in/out of a flood zone. This new approach allows more granular pricing, with private flood insurance gaining traction as the market is positioned for transformation.

With private insurers unbound by federal program appropriations, they can continue to write new and renew policies even when the NFIP is unavailable, providing continuity and flexibility. Private flood insurance is increasingly becoming complementary to public programs, offering new pathways to address the evolving flood risk landscape.

Some key opportunities for private insurers potentially include:

• Expanding coverage to underserved regions, especially inland and moderate-risk zones.
• Developing tailored products that address sub-limits and coverage gaps.
• Leveraging advanced modeling to price risk accurately and competitively.
• Building resilience through consumer education and collaboration with regulators and communities.

 

Parting thoughts: Navigating a changing flood insurance landscape

• Recent data and catastrophe modeling highlight the persistence of the flood protection gap in the U.S. However, the emergence and expansion of private flood insurance introduces new options for property owners, offering broader coverage and continuity during lapses in NFIP.
• Market participation from both public and private sectors continues to shape the future of flood risk protection. Trends show ongoing changes in awareness, availability, and resilience strategies across regions and stakeholder groups. As the regulatory environment adapts, and new technologies become available, stakeholders are presented with a wider array of tools and choices for managing flood risk.
• The flood insurance landscape is evolving, with implications for lenders, insurers, homeowners, and communities alike. For those monitoring the market, these dynamics underscore the importance of staying informed about regulatory updates, product innovations, and regional risk trends.
• One additional consideration is the sustainability and affordability of rates. Increasing take-up rates introduces greater mutuality, spreading risk across a wider pool and potentially reducing average premiums per policy.

 

Find out more about Moody’s flood risk modeling solutions here.