Replenish the national flood insurance program


J. Tim Request

“If it can rain in your home, it can flood in your area,” is a phrase well known to meteorologists and the insurance industry, among others. A recent study by the Insurance Information Institute found that about 90 percent of all natural disasters in the United States involve flooding. A single inch of flood water can cause up to $ 25,000 in damage.

Most homeowner and tenant insurance policies do not cover flood damage. Flood insurance is a separate policy that can cover buildings, the contents of a building, or both. However, flooding as a risk exposure violates the characteristics that constitute an insurable risk. Typically, exposure units during a flood are not independent of each other, which can lead to catastrophic loss. Adverse selection is also problematic, as owners of property with a higher probability of flooding are more likely to seek protection.

Due to the issue of insurability, the National Flood Insurance Program was established in 1968. The NFIP provides flood insurance to homeowners, tenants and businesses, which helps them recover afterward. the withdrawal of flood waters. To determine if a home you own, rent, or plan to buy is in a flood zone, you can enter the address on the Federal Emergency Management Agency’s Flood Map Service Center website.

Flood insurance covers losses directly caused by flooding. If a sewer backup is not caused directly by a flood, the damage is not covered. Flood insurance can be purchased from agents or brokers who represent private insurers. The FEMA website has a tool to find participating insurance providers by state. Contact your insurance agent for more information.

Some reasons not to rely on the federal government to bail out flood victims include the fact that federal disaster assistance comes in two forms: a loan, which must be repaid with interest, or a FEMA emergency grant. disaster, which is about $ 5,000 on average per household. In comparison, the average flood insurance claim in 2018 was over $ 40,000.

FEMA is currently in the midst of a major overhaul of the national flood insurance program and is expected to increase premiums in high-risk flood areas from 379% to 1,216%. The Insurance Journal reports that the federal flood program has lost more than $ 36 billion since its inception by Congress 53 years ago. Insufficient premiums and a series of major hurricanes over the past 16 years have largely contributed to this deficit.

While FEMA has not publicly shared the impact of its new “Risk Rating 2.0” overhaul on individual bonuses, simulation studies have been conducted by the nonprofit research group, First Street Foundation. First Street’s attempt to replicate FEMA’s approach is based on the best information available, so these are just estimates.

A tool on their website gives the projected premium changes by zip code. As an example, the postal code 88011 has been entered. There are 10,090 houses / structures in this postcode, 2.7% of which are at risk of damage from a 100-year flood. Premiums could increase by almost 7%, as the average annual loss for these properties is $ 555, which is higher than the estimated NFIP premium of $ 519. The impact in this example is not as drastic as expected in low-lying coastal areas.

Maybe our local monsoon season is a good time to assess whether you should have flood insurance coverage.

J. Tim Query, PhD, CPA, ARM, is the Mountain States Insurance Group Endowed Chair at New Mexico State University. Learn more at

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