Are Flood Losses Getting Worse?

Are flood losses getting worse or are we hearing more about them?  Moreover, what can we do from an underwriting position if losses are becoming worse?

We all have heard how the U.S. Army Corps of Engineers took two dramatic steps this past year to reduce the potential damage of the Mississippi River flood.  The first was to blast a two-mile hole in the levee south of Cairo, Illinois, to protect the city from the rising waters of the Mississippi and Ohio Rivers.  Further down river, the U.S. Army Corps of Engineers opened floodgates to protect the cities of Baton Rouge and New Orleans.  Early estimates of the 2011 Mississippi flood damage are well into the billions.  However, are damages getting worse?

According to the National Oceanic and Atmospheric Administration, in 2010 the annual flood loss was $5.0 billion.  In the last ten years, the largest annual loss due to flood, adjusted for inflation, was $49.7 billion (2005) and the smallest was $1.0 billion (2009).  Over a broader period, the decade of 2000-2009 had annual flood losses, on average, of $9.9 billion per year; the decade of 1990-1999 saw an average of $7.8 billion; and the decade of 1980-1989 decade came in at a $4.8 billion average.  So, it would appear that, in fact, the damage is getting worse.

I will let you or the actuaries at Merlinos & Associates debate the merits of using a straight average vs. a weighted average vs. a trend analysis vs. any of the many other mathematical techniques.  I more inclined to look at this from the insurance side.  We all know that the National Flood Insurance Program (NFIP) through Federal Emergency Management Administration (FEMA) underwrites almost all the flood coverage written in the U.S. In other words, you and I as taxpayer underwrite this coverage, and we underwrite it because no one else will.  Insurance companies would have to charge a premium that would be too high for most people to afford. While flood insurance is usually a higher premium dollar than standard home policy, the premium does not fully cover the exposure.  Therefore, FEMA writes the coverage at a subsidized premium level and makes up the difference with tax dollars.

I have written flood coverage on many properties in the Savannah, Georgia, area, and I have seen the damage that a flood can do to a home and the cost to the NFIP.  However, what choice do we have?  One of the items that most underwriters review before determining a premium for a risk is the number of losses over the past several years, and at some point the number of losses will exceed a comfort level for the underwriter so they will pass on the risk.  Does NFIP have the ability to say no?  Not really.  If you purchase a house in a flood prone area, the mortgage company is going to require you to purchase flood coverage, and NFIP is really your only option.

That does not mean that FEMA and other emergency management entities are not trying to save Joe Q. Public some money here and there.  FEMA, State Emergency Management divisions, and local governments are currently working together to purchase the properties that routinely flood.  In West Virginia for example, county officials recently made offers to buy 21 properties.  I am sure not all property owners will agree and then what do we do?  Do we make them leave as we would in imminent domain issues?  Do we tell them that they no longer have flood coverage?  What do you think we should do to properties that routinely flood?  Additionally, should the taxpayers subsidize the premium?

J. Allen Fricks, CPCU, ARM, ALCM, is a consultant at Merlinos & Associates.