I have a serious issue with flood insurance in our country. My problem is not with the product per se. It is with how it is offered, explained, and marketed to consumers. For my entire 30 plus year career in this industry, the customers of mine who purchase it do so because they have to – period. Sure, I have a few customers who conservatively buy a policy so they can sleep better at night when it pours for a few days straight, but I can count those people on two hands. Why is this so?
Truthfully and technically, mortgage companies and banks own our homes until the note is paid off. It is their house until the balance is zero. And they in turn make you protect their home by forcing you to purchase home insurance. You cannot close a home sale without it. So please tell me why don’t they feel the need to cover the peril of flood? Home insurance policies, by the way, exclude coverage for floods.
Statistics show that 38-40% of all flood claims occur in “non-flood” zones these days. That number is absolutely incredible to me. As we saw in Waverly Tennessee last week, floods can destroy homes – knock them completely off their foundations, make the inside uninhabitable because of the inevitable mold that occurs afterward, and in the process completely uproot families and businesses. Some homeowners had flood insurance in Waverly, but a whole lot of them did not. What happens to these people and business owners? What kind of losses are we talking about for these banks and mortgage companies? (And let me add that I promise you there were multitudes of people who thought that there home or business was covered by their current insurance policy. And it wasn’t. Just like many thought in Nashville in 2010).
Would a simple solution not be for implementing a law that all mortgage-backed homes and businesses be forced to have some sort of flood insurance? Even if you lived on top of a hill you would HAVE to have a policy that covered the peril of flood. The family on the hill in the non-flood zone would pay far less than the family in a designated flood zone, but the law of large numbers would take over here logically and the entire National Flood Insurance Plan could be revamped with better coverage and perhaps better pricing for everyone. If you own your home outright then you would not have to have a flood policy. It is your house. You can take that risk. Go for it.
Yes, there have been recent enhancements with rates across the country this Summer. That was step one. But the program is still broken and needs to be further enhanced. Simply put, there are not enough premium dollars coming into the federal flood program to adequately begin to cover potential losses. Ever wonder why flood insurance is not offered on a mass basis by insurance carriers? Simple. It’s because NFIP loses hundreds of millions of dollars every single year. If you currently have a flood insurance policy with an insurance company’s name at the top, understand that the federal government has the carriers issue these policies for them as a convenience. The insurance company gets sliver of money to do this. When a loss occurs, the NFIP (the US Government) takes the loss, not the insurance company. No insurance company would be dumb enough to take a known loss leader from day one. The Federal Government of course is dumb enough.
Those leaning conservative will see this idea as an additional “tax” in a sense to homeowners and might ask “why do I need to have a flood policy – my house never floods?”. Ask some residents of Waverly Tennessee that question. A lot of those fine people were not in flood zones either. They were part of the 38-40% I mentioned. Those in the real estate business (I am one of you as well – I own part of a very successful real estate firm here in Nashville with my brother) may not like this idea either. You might see it as just “one more thing to force buyers at closing to buy”. A zone X (non-flood) policy costs about $400.00-$450.00 annually these days. Do you think that is going to screw up your sale? Really?
Sorry, I just don’t see it. It makes zero sense not to protect your home or business fully (or as I mentioned earlier for lending institutions not to protect them). There is a way to revamp the flood insurance program more than it was with the recent changes this Summer. The purpose of insurance is to allow families and businesses to get back on their feet when the “worst of the worst” happens. Dreams and memories in Waverly were shattered last weekend when a catastrophe came down in the form of a record-breaking 17 inches of rain. It will happen many more times across the country as well and there needs to be a vehicle to help these families get back on their feet. Additionally, there are far too many homes that have been built in major flood zones or exist in newly formed/updated flood zones. At some point, it is just not going to work and those homes need to be torn down. As the saying goes, “God didn’t make any more dirt”. And this is true. But we certainly are building on every spare piece that’s left – but that’s another story. At some point, mother nature wins.
I would love to hear from my friends in the upper levels of the lending business (and insurance as well of course) to give me some insight as to why this idea cannot happen. Fire away.