Private Market For Flood Insurance?
A lack of a private market for flood insurance prompted the federal government to create the National Flood Insurance Program(NFIP) in 1968. Operated under the Federal Emergency Management Agency(FEMA), the NFIP accumulated losses of over $17 billion in the aftermath of the Hurricane Katrina disaster.
While the legislation to reenact the program would forgive this debt, it just goes to show how risky it could be for the insurance industry to enter this market unless they charged much higher premiums than the government. However, Nationwide Insurance is lobbying Congress to include flood coverage in their home owner’s policies.
Nationwide’s plan, which would require congressional approval, calls for the Columbus, Ohio-based company to sell flood insurance at the same price as NFIP policies. However, policyholders would have the option of buying flood coverage beyond the limits of the national program.
In the aftermath of the August 2005 storm, thousands of property owners in Mississippi and Louisiana without flood insurance sued their insurers for refusing to cover damage from Katrina’s wind-driven storm surge. “We see this (plan) as a viable alternative to much of the litigation that occurred post-Katrina,” Zimpher said. “No one, whether it’s insurers or consumers, benefits from litigation.”
There is no question that it’s a bold move on Nationwide’s part and it would solve the wind vs. water debate, but is it feasible? Other insurance carriers have taken the opposite approach and have decided to scale back wind coverage to protect themselves from potential litigation.
It would be a risky plan, as the losses by the NFIP showed, yet it could work as there is a large untapped market out there for flood insurance. A recent survey by the Insurance Information Institute estimated that only 17% of Americans have purchased flood coverage but one would assume that Nationwide believes that they would do a better job than FEMA at marketing the product.
However, Nationwide is not exempt from a number of large insurance carriers who have canceled policies for some homeowners along the Gulf Coast in an effort to reduce exposure from hurricane claims. Now while it would of great benefit to get more people to purchase flood insurance, since the current numbers are almost laughable, there is a concern that homeowner’s with the highest risk profiles would still be left in the dark.
