Friday, October 4, 2013

Why Flood Insurance Is Separate From Homeowner's Insurance

Most homeowners insurance policy's do not include coverage for flood insurance. As a result homeowners generally need to get a second policy if they wish to insure for the risk of flood from rising water. This brings up the question of why insurance company's do not include flood coverage?
The primary reason is that a major storm can produce billions of dollars in flooding damage. The risk is so great that most insurance carriers are not willing to offer that coverage. A good example is that when hurricane IKE hit in 2008 the National Flood Insurance Program (NFIP) paid more than 44,000 flood claims totaling over 2 billion dollars in Texas alone. A more recent example is hurricane Sandy in 2012 where flood policy losses are estimated to be more than 12 billion dollars.
Another reason hazard insurance policy's do not usually offer flooding coverage is that insurance carriers are reluctant to compete for business with the federal government's NFIP program. Especially since the government program has been in effect selling the NFIP pollicy's at such a low cost that the program has racked up billions in losses.
The National Flood Insurance Program was created by the federal government in 1968. Public demand for a government flood insurance program started in the early 1960s. Widespread flooding along the Mississippi River resulted in most private insurance company's exiting the market for flooding insurance. The vast majority of flood policy's are now issued with the NFIP.
In my state of Texas there are actually some homeowners policy that do include flood coverage. However this is mostly for mobile homes, and carriers typically only offer flooding coverage in areas at low risk on floods.
Historically the NFIP has offered flood policy's at a cost below the true cost of providing the coverage. Taxpayers have been subsidizing the low rates offered by the NFIP. However the large losses from the NFIP are resulting in pressure to make the program more self supporting. In 2012 the Biggert-Watters reform act was passed. This made some changes that resulted in higher costs for many NFIP policy's. There is a very good chance that NFIP rates will continue to rise as the government tries to reduce losses from the program. As the cost of government flood policy's rise, it then becomes more likely that private insurers may begin offering some flood coverage with their hazard policy's in the future.

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