Post-Hurricane Harvey news stories brought national attention to the fact that only 17% of homeowners in affected areas had flood insurance. That means a staggering 83% are left having to pick up the tab themselves, or rely on government assistance. And many perhaps don't have the capability to rebuild and recover at all.
Some of the flooded areas were outside of the Federal Emergency Management Agency's (FEMA) designated Special Hazard Area or 100-year floodplain. Historical statistics show that 20-30% of all flooded properties lie outside of floodplains. It's somewhat understandable why homeowners in these areas would not have flood insurance. But why is it that so many people in Special Hazard areas knowingly go without coverage and expose much of their life savings to a flood event, especially with the average subsidized premium charged by the the National Flood Insurance Program (NFIP) between $400-800 per year?
A recent study conducted by "Resources for the Future" draws a very simple but powerful conclusion. Homeowners who have experienced flooding in the past have a very different view of the exposure and probability of suffering a loss. They view it as a 1 in 50 probability, while people who have not experienced a loss see the odds as 1 in 200.
So with homeowners uncertain about their level of risk, and heavily reliant on personal experience, what should be done to help raise the resilience of communities to natural disasters like flood?
At Swiss Re, we often talk about 'the protection gap,' which is the difference between economic and insured losses. We're trying to raise awareness and educate people about the real level of risk they are exposed to.
There's a social responsibility on the part of the insurance community and federal and state governments to alter the psychology of homeowners when it comes to flood insurance. No one group can manage this alone, and it will take the public and private sector working together to get to where we want to be.
The average take-up rate for flood insurance countrywide is only 14%, and it's been at about that level since 2009. If ever there was a time for the industry to make meaningful strides to improve the personal lines flood insurance system, it's now, with the NFIP set to expire, and likely to be reauthorized later this year.
Category: Climate/natural disasters: Floods/storms
Location: United States