Why Flood Insurance Is Separate From Homeowners Insurance
Most homeowners insurance policies do not include flood insurance coverage. As a result, homeowners generally need to obtain a second policy if they wish to insure against the risk of flooding from rising water. This raises the question of why the company’s insurance does not include flood coverage.
The main reason is that a major storm can produce billions of dollars in flood damage. The risk is so great that most insurance companies are unwilling to offer such coverage. A good example is that when Hurricane IKE struck in 2008, the National Flood Insurance Program (NFIP) paid more than 44,000 flood claims totaling more than $ 2 billion in Texas alone. A more recent example is Hurricane Sandy in 2012, where flood policy losses are estimated to exceed $ 12 billion.
Another reason that hazard insurance policies often do not offer flood coverage is that insurance companies are reluctant to compete for business with the federal government’s NFIP program. Especially since the government program has been selling NFIP policies 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 began in the early 1960s. Widespread flooding along the Mississippi River caused most of the private insurance companies will exit the flood insurance market. The vast majority of flood policies are now issued under the NFIP.
In my state of Texas, there are some homeowners policies that include flood coverage. However, this is primarily for mobile homes, and operators generally only offer flood coverage in areas with low risk of flooding.
Historically, the NFIP has offered flood policies at a cost that is less than the actual cost of providing the coverage. Taxpayers have been subsidizing the low rates offered by the NFIP. However, the NFIP’s large losses are creating pressure to make the program more self-sufficient. In 2012 the Biggert-Watters reform law was passed. This made some changes that resulted in higher costs for many NFIP policies. There is a very good chance that NFIP rates will continue to rise as the government tries to reduce program losses. As the cost of a government flood policy increases, private insurers are more likely to start offering flood coverage with their hazard policies in the future.