How to make flood insurance program one based on true risk

Written by Cindy Nevitt Friday, February 22, 2013 09:54 am

In five years, your flood insurance policy will transition fully from one that is subsidized by the federal government to one that is fully paid by you in an amount that reflects the actual risk your property stands of being flooded in a 100-year storm.

Owners of properties that are not compliant with various building codes, including those of the Federal Emergency Management Agency and their individual municipality, could be facing $30,000 annual premiums in a post-Sandy world. Premium increases, as much as 25 percent per year until you are paying the actuarial cost of your policy, are being discussed with a casualness that does not represent the hardship it is.

These momentous changes are brought to you courtesy of the Biggert-Waters Act, passed in July 2012, which aims to remove the National Flood Insurance Program from federal life support. Within six months of the passage of that act, FEMA released its new advisory base flood elevation maps, elevating the base heights at which properties are to be built to withstand a storm that has a 1 percent chance of occurring in any given year.

So much expense for such a little chance such a storm will be repeated here.

How do annual flood insurance premiums that rival the price of a new car represent a property owner’s actual risk of flood damage? That’s like buying a new car every year just so you can get the one you’ve been driving off the road to keep it from getting in an accident.

Most insurance companies let you name your price. Progressive, for instance, lets you pick what you’ll pay for car insurance. Your premium dictates what your policy covers. If you think it's too little, you can increase the coverage by raising the premium. If the bank holds a loan on your car, you are obligated to carry more insurance. But once the car loan is paid off, you can scale back on the amount of insurance coverage you carry.

Flood insurance should be the same way. Homeowners should be obligated to cover the outstanding amount of the mortgage, and not be required to cover the entire assessed value of the home, as FEMA's outlandish premium schedule suggests.

Homeowners insurance is a pick-your-price proposition, as is the deductible. You dictate how much liability insurance you want to cover the klutz who might trip and fall on your property. Content coverage is completely optional, as is wind insurance.

The insurance industry will cover almost anything, including body parts. Supermodel Heidi Klum’s legs ($1.2 million for the right leg, $1 million for the left), Jennifer Lopez’s rear ($27 million), professional football player Troy Polamalu’s hair ($1 million), and country star Dolly’s Parton’s biggest assets ($300,000 each) are all insured against loss.

In fact, if you’re of the opinion there’s intelligent life out there, you can even buy alien abduction insurance.

You can put any price of your choosing on your own head when you purchase life insurance. As most of us are worth more dead than we are alive, it can be an ego boost to pick a number with multiple zeroes trailing it.

Even health insurance, which supposedly covers the most valuable commodity of all (life), is a pick-your-premium kind of arrangement. Employers who provide such coverage select from a variety of plans, naturally opting for the cheapest. That means high deductibles, no vision or dental insurance, outrageous co-pays for the subscribers and “managed care” that entails denying as many claims as possible.

The federal government, in transitioning the flood insurance program from one that is subsidized to one that reflects actual risk, is pretty much engaging in extortion by forcing people to buy coverage beyond what would be needed to satisfy a bank loan. Why should the bank care, as long as it gets paid for the outstanding mortgage amount? The homeowner can pay his share of the repairs, sell the damaged property at a loss, or walk away with nothing.

Homeowners without mortgages are not required to buy flood insurance, and many, hearing the astronomical rates about to be imposed upon them, are planning to drop their coverage. As long as the bank holding the mortgage is satisfied the insurance policy is adequate to cover what it is owed, there should be no legal requirement that a homeowner buy a flood insurance policy for the entire value of his property.

That would be the true definition of risk: A property owner choosing to jeopardize his equity in his home for the chance to pay a less onerous flood insurance premium.