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.

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.

Related: Top 10 states for National Flood Insurance Program payouts in 2014

“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.”

Flood lines

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

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