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22 Apr 16 20:01

The recent storms in the Houston area have once again brought the topic of the Protection Gap to the front pages of the news. It's estimated that a large portion of losses from that event won't be covered by insurance leaving homeowners, governments and taxpayers to pick up the tab.

For more details on the major rainfall event in Texas, please click here. So why don't people buy insurance for flood (and earthquake for that matter)? It got me thinking about my own home and what coverage I have in place. I don't currently buy flood or earthquake insurance. But why not?

Recently I brought up my insurance company's website and logged in to view my existing policies which was quick and easy. I was then able to get a quote for earthquake insurance over the online chat feature of the website. It was an annual premium of a little over $200 at a 10% deductible (10% of coverage A or the Dwelling value). Admittedly, not an exorbitant cost, but very little perceived value when I think about having to pay approximately the equivalent to one full year of college tuition at a private university (think $65k) should an event occur. And, as long as I have lived in Connecticut, I think I can remember one earthquake (something like 2.9 on the Richter scale). It sounded like a large truck driving by and shook the house a little bit.  My company did offer higher deductible options all at reasonable prices but the 10% option was the lowest deductible option. Now I'm starting to understand why the take up rate for earthquake may be so low.

As for flood, the person helping me online was not able to quote flood insurance for me but she did refer me to the local office. I called the 800 number and was provided a quote over the phone. They were able to map my address, determine my Flood zone (zone X) and after answering a few simple questions they were able to provide a "Preferred Risk" quote from the National Flood Insurance Program (NFIP) in just a few minutes. The premium was $499 for $250,000 of Building coverage and $100,000 of Contents coverage with deductibles of $1,250 applying separately to each coverage ($1,250 for Building, and $1,250 for Contents). I asked if my coverage A value had any impact on the price and she explained that it did not.  Let's think about that for a second. If my coverage A value is $300,000 or $5,000,000, I can get the same limits for the same price.  This is when I started to get skeptical. Again, the perceived value is somewhat limited. I later realized that I could have come up with the same premium numbers by myself by accessing the NFIP website https://www.floodsmart.gov/floodsmart/.

My wife and I have lived in our house for 20 years and not flooded once during that time period. Now I could buy lower limits from the NFIP which might help lower the price a little, but what I think would have more value would be to look at higher deductible options, or even better, to pay a premium that reflected the level of risk associated with my property. As most people in the insurance industry know, there is a great deal of subsidization that goes on within the NFIP so most, if not all, of the lower risk properties end up paying more than their fair share so that the owners of high risk properties can afford insurance. I would consider buying flood insurance when I perceive value. If I'm charged a premium based on my specific risk characteristics I would have a much easier time getting comfortable with it - what can I say, it's the underwriter in me!  Hopefully in the near future we'll be able to get a flood quote from a private company that truly assesses the risk of my specific property and charges a risk adequate rate, although I'd still like to see several deductible options to customize the coverage to my risk appetite.

What would make you buy flood insurance?


Category: Climate/natural disasters: Climate change, Disaster risk, Floods/storms, Resilience

Location: Houston, TX, United States


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