Americans from Port Arthur, Texas, to Key West, Fla., are in the midst of a massive rebuilding effort as they recover from 2005′s hurricanes. Fortunately, much of this reconstruction is financed by insurance claims payments–either from private insurers or policies issued by the National Flood Insurance Program.
As the current hurricane season began (experts predict an 81 percent chance of a major storm hitting either the Eastern seaboard or Gulf Coast this year), state and local governments were tackling difficult public policy issues, such as tougher building codes and land-use regulations, to help reduce the economic and human losses from future natural catastrophes.
Congress can do its part by making much needed and long overdue reforms to the NFIP before individuals and businesses find out that their flood insurance policy is inadequate or nonexistent.
Private insurers have long excluded flood losses from homeowners and business insurance policies because it is impossible to adequately spread the risk. Unlike fires, thefts and auto accidents, only individuals and businesses in the highest-risk areas buy flood insurance–and most only because their mortgage lender requires them to.
The NFIP was established in 1968 to insure consumer access to affordable flood insurance. For nearly 40 years the program has answered this call reasonably well.
However, in the wake of the 2005 hurricanes, it has become increasingly apparent that the NFIP is in need of significant reforms to better protect consumers in flood-prone areas, as well as taxpayers across the country who help finance the program.
Before the creation of the NFIP, the federal response to flood disasters was to build more levees, more dams, and to rush taxpayer aid to the affected areas. This process was inefficient and unfair to the millions of taxpayers with minimal exposure to flood risks, while doing nothing to discourage unwise development in flood-prone areas or reduce repeated flood losses.
Consumers who live in a federally mapped flood zone and who have a federally backed mortgage must buy flood insurance protection. Other consumers who live in flood zones are typically offered federal flood coverage by their agent or broker, but are not required to purchase it.
NFIP policies are capped at $250,000 of coverage for the structure and $100,000 for contents. Last year's hurricane season demonstrated the program's weaknesses when many people found their flood coverage to be inadequate or, worse yet, did not buy the federal insurance protection because outdated maps did not place them in a flood zone.
Since Hurricane Katrina hit the Gulf Coast last fall, there have been numerous proposals to reform the way our nation prepares for, responds to and recovers from natural disasters. However, the one reform that nearly everyone can agree upon is a retooling of the NFIP that will protect consumers and communities, while reducing taxpayer risk.
Those reforms should come immediately, and they should focus on three key areas: education, efficiency and effectiveness.
Everyone knows that most consumers never read their insurance contracts. They are filed and forgotten until a claim is made.
Ultimately, consumers must be responsible for buying the proper type and amount of insurance to protect their home or business. But insurers, agents and brokers, as well as government officials at the local, state and national level must help educate consumers about what their homeowners policies cover and what they don't.
There's also no arguing that home values in communities across the nation have increased at a staggering rate over the past few years. It makes sense to increase the NFIP flood policy limits to provide consumers with the option of purchasing coverage to accurately reflect current property values.
Of course, American taxpayers should not be required to subsidize insurance coverage for the extraordinarily well off. Too often, the current program provides a bailout for those with expensive properties in hazardous flood areas–vacation homes on barrier islands, for instance. This is unnecessary and ineffective, and should be a cornerstone of reform efforts.
Reforms should also make policy rating simpler, less cumbersome and more understandable so policies can be priced accurately and better reflect the risk. Owners of higher risk and higher value properties should pay more for coverage, while lower risk consumers should pay less.
Finally, flood maps must be updated–as we know from Hurricane Katrina's impact on New Orleans, the mere existence of a levee does not eliminate the risk of flooding–to ensure that people better understand their risk and take adequate steps to protect their homes and businesses.
These common-sense reforms should generate support by an overwhelming majority of Congress. Moreover, they should be embraced not only by the insurance industry (which works with federal officials to sell and service flood insurance policies), but by lenders, builders, realtors and taxpayers across the country.
Enacting these reforms would be an excellent example of an ounce of prevention being worth a pound of cure.
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