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October 7, 2015

It’s Time to Rethink Flood Coverage

Summary:

The floods in the Carolinas show it is time to "loosen the exclusion" on coverage. Otherwise, we'll just keep making the same mistakes.

Photo Courtesy of U.S. Geological Survey

“The boat is safer anchored at the port; but that’s not the aim of boats.” — Paulo Coelho

The scenes are now all too familiar. Waters rising, dams breached, cars drifting away, homes and properties inundated with water. As of this writing, 13 people have died in the Carolinas as the “one in a 1,000 years” flood continues to ravage the area. Losses should easily exceed $1 billion.

If all of that was not bad enough, what’s worse is that you and I will be paying for this.

Unfortunately, the song remains the same after all these years:

  1. Property insurance policies exclude flood coverage
  2. Property owners either believe they have coverage or choose not to purchase it
  3. The biblical rains arrive, causing damage, and property owners seek help from the largest wallet available and willing to help…the U.S. government
  4. (Alternatively, and unfortunately, property owners may buy flood coverage, but, because the coverage was mispriced, the National Flood Program will not have the funds to pay the claims and will need to borrow from us taxpayers).

The system is a mess, and my criticism lies directly with the insurance industry. We can solve this problem. These floods are insurable events. We are flush with capital, and each week it seems another technology firm is releasing a flood model to help us manage this risk.

But that sound you hear is crickets. We are not making much progress at all.

The solution cannot be separate, private, flood coverage. That is a nice start but is not the solution, because it’s more of the same, just with a different wallet writing the check.

What we need is to “loosen the exclusion.” Flood needs to become a standard component in the homeowners policy. Just as fire, wind, lightning, theft, vandalism and liability are all standard components of a homeowners insurance package, flood needs to be included as that form of standard coverage.

The advantage to homeowners is true peace of mind.

  • Every homeowner has some ground water risk, and we can eliminate this coverage concern once and for all.
  • We can eliminate policy juggling, with one single policy.
  • A single claims adjuster can determine any losses without needing superhuman insights to know whether water or wind caused the damage.

The enterprising insurer gets to differentiate its personal lines business with a non-correlated premium source. The insurer eliminates the headache of defending flood exclusions and the bad publicity and court judgments around those issues.

Some insurers will be rightly concerned about the increased risks. But isn’t this the business we are in? It may feel safe to exclude coverage, but our role in society is not to exclude coverage. Our role is to find a way to profitably make our capital available for these type of events.

We have all the tools and capital we need to make this happen. Do we have the will?

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About the Author

Nick Lamparelli has been working in the insurance industry for nearly 20 years as an agent, broker and underwriter for firms including AIR Worldwide, Aon, Marsh and QBE. Simulation and modeling of natural catastrophes occupy most of his day-to-day thinking. Billions of dollars of properties exposed to catastrophe that were once uninsurable are now insured because of his novel approaches.

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