By failing to prepare, you are preparing to fail. – Benjamin Franklin
Superstorm Sandy was the largest Atlantic hurricane on record, spanning 1,100 miles, affecting 24 states from Florida to Maine and as far west as Michigan. In New Jersey and New York, the storm surge reached 14 feet above average low tide, crippling the financial center of the world. In Sandy's wake were 285 dead and $70 billion in damage. From an insurance perspective, less than half of those affected were insured. [Aon Benfield 2013/NOAA]
Less than one year later, torrential rains resulted in a flash flood in Boulder, Colo., causing $2 billion in damage with less than 2% of losses insured. [FEMA] In 2015, Texas and Oklahoma experienced catastrophic flooding with projected losses exceeding $3 billion, with only one third insured. [Aon 2015]
Some additional statistics for consideration:
- Due to climate change and increased coastal urbanization, flood damage is expected to double every decade for the rest of the century. [National Academy of Sciences]
- Of the 10 million properties in the U.S. at higher risk of flooding, slightly more than half are insured through the National Flood Insurance Program (NFIP). [Risk Assessment, Mapping and Planning Partners (2013) Flood Hazard Demographics and NFIP Policy/Claims Analysis (2013)]
- There is a 26% chance that these at risk properties will experience a flood loss during their 30-year mortgage, with an average cost of more than $35,000 [Risk Assessment, Mapping and Planning Partners (2013) Flood Hazard Demographics and NFIP Policy/Claims Analysis (2013)]
- There is a 1% chance of a home burning in the same 30-year term, costing an average of $18,000, and yet only 5% of Americans go without homeowners insurance. [NFIP]
With evidence of increased flood risk, why are less than 7% of homes and half of high-risk properties insured against flood? [NFIP/U.S. Census Bureau]
The public perception of flood insurance
Studies indicate that one out of five people believe flood is covered under their homeowner's policy. This suggests the majority of property owners understand they can only receive flood insurance by purchasing it separately. [Bankrate.com]
After Superstorm Sandy, interviews with some homeowners revealed they simply didn't purchase flood insurance because it lacked the two coverages they felt were necessary: Basement coverage and additional living expense.
Flood waters enveloped this neighborhood in the Strathmere section of Upper Township N.J. on Friday Oct. 2, 2015. (AP Photo/Wayne Parry)
In one example, a restaurant owner candidly pointed out he already had the means and the employees willing to renovate and re-open to a strong customer base that hadn't evacuated. Under these circumstances he had little time for regulations and insurance procedures, but mentioned he would be more inclined to purchase flood insurance if it included more coverage he considered valuable, like business income interruption and extra expense.
Is the NFIP keeping up with current market needs?
The NFIP was created in 1968 by the U.S. federal government in an effort to provide standard flood insurance for a risk considered too catastrophic for the private market.
“Coming up on its golden anniversary, the program has served its purpose of protecting American homeowners and business owners, stabilizing real estate markets, categorizing flood risk within the floodplains and promoting responsible land management,” said Keith Brown, CEO of Aon National Flood Services, a third-party NFIP administrator on behalf of insurance companies participating in the Write Your Own (WYO) flood program.
Over recent years, many of these achievements have come under pressure, including: flood maps, rates, and the $23 billion debt owed to the U.S. Treasury. Is the NFIP suffering from an identity crisis? Is it too constrained by legislation to achieve its objectives? One just needs to reference the Biggert-Waters Flood Insurance Reform Act of 2012 and Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) to understand the challenges.
There has been considerable discussion at the legislative level about the inadequacy of rates, especially the subsidization of the highest risk properties [GAO],and the product offerings available with the NFIP.
“The homeowner is aware of the coverage that exists in their homeowner's policy and expects that the same coverage is present in their flood policy,” said Terry Black, vice president of claims at Aon National Flood Services. “One of the hardest conversations with a homeowner right after a devastating flood is the one explaining there is no provision for additional living expenses.”
The high water mark on this garage reached to the top of the door following the 2010 floods in Nashville. (Photo: P. Harman)
A quick comparison of homeowner's and NFIP flood insurance
Black explained that the differences between a typical homeowner's insurance and NFIP flood insurance include other coverages as well. This chart illustrates many of the differences between the two policy forms:
| Coverage | Homeowners | NFIP Flood Insurance |
| Perils Insured Against | Dwelling: All Risk Contents: Named Peril | Surface water that affects your property and one other or 2 acres of dry land |
| Coverage Limits | Variable depending on coverage requirements | Dwelling limit: $250,000 Contents limit: $100,000 |
| Settlement Recovery | Dwelling: Replacement cost Contents: Actual cash value, with replacement cost option | Dwelling: Replacement cost Contents: Actual cash value |
| Loss of Use | 20% of dwelling coverage | No coverage |
| Basement Contents | Covered under contents limit for named perils | No coverage |
| Contents Outside Premises | 10% of contents coverage | No coverage |
| Fences, Retaining Walls | All risk | No coverage |
| Special Contents Limits | $200 on money; $1,500 securities; $1,500 theft of jewelry; $1,500 theft of furs; $2,500 theft of firearms; $500 business property | $2,500 maximum for loss of jewelry, art, memorabilia, furs, business property |
| Trees, Shrubs, Plants, Lawns | Named peril, 5% of dwelling coverage, up to $500 per item | No coverage |
| Decks | Covered under dwelling limit | Coverage for 16 square feet |
| Ordinance or Law Coverage | 10% of dwelling limit | Up to $30,000 for compliance with flood ordinances such as elevation, flood proofing, relocation or demolition |
| Code Upgrade | Contained within above dwelling limit | No coverage |
| Loss Assessment Coverage | $1,000 | Included in dwelling amount |
| Loss Avoidance Coverage | No coverage | $1,000 for sandbags, pumps, temporary levees |
(Photo: Leonard Zhukovsky/Shutterstock)
Looking to the future
There are currently 5.2 million homes insured through the NFIP and that number is falling. [Bankrate.com]
“There is some anecdotal evidence that homeowners have begun to take advantage of more sophisticated flood products,” said John Dickson, president of Advanced Insurance Coverages, Inc. (AIC), a broker specializing in private flood solutions.
“By imposing new policy surcharges and increasing certain rates, Biggert-Waters and HFIAA opened the door to the private market to compete with the NFIP,” Dickson said. “While we are focused on improved flood insurance pricing, we also provide products that fill the NFIP coverage gaps around basements and additional living expenses.”
One such policy offered by AIC is FloodWrap, a policy designed to address the NFIP coverage gaps. Excess Flood insurance is also offered by AIC and can increase the limits of eligible NFIP policies up to $20 million based on specific risk type.
Private insurance flood policies that serve as an alternative to the NFIP are offered through large well-capitalized companies. Recognizing the significant risk flood represents, these products are emerging in a disciplined and structured manner. For example, the private flood policy offered through AIC is available only for single family homes located in 'A' flood zones.
Flooding in Washington state. (Photo: Thinkstock/dschreiber29)
What can agents do to stem the rising tide of flood losses?
“Every time an agent writes a homeowner's policy, they should be quoting flood insurance,” said Brown. With WYO programs now available to many agents and brokers, writing and issuing flood policies is much easier than it was previously.
“By offering flood coverage at the point of the homeowner sale, in addition to offering protection to your clients from devastating losses, you're also helping to protect yourself from potential errors and omissions claims,” said Brown.
It is recommended that agents quote flood with all Homeowners quotes and allow the insureds to decide whether they wish to purchase via a waiver form similar to uninsured/underinsured motorist coverage. This provides the insured with a risk analysis and associated premium while also reducing agent risk of E&O exposure.
There are several resources available online like flood maps, loss calculators, videos and other educational materials for agents and consumers. [floodtools.com, FloodSmart.gov]
Agents should also explore the new private flood insurance market. With recent legislation and a wave of new products “flooding” the market that may offer lower premiums and more expansive coverage, the future of flood insurance offers new possibilities for both agents and their clients.
Gregory Knuffke, CPCU, is the assistant vice president of analytics and product development at Aon National Flood Services, the largest processor serving insurance companies participating in the NFIP. To learn more, please visit contact NFS at (888) 888-2169.
This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.
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