Often times after I have given somebody a private flood insurance quote, they will ask me why it is so much lower in price than the insurance policy they are currently carrying through the National Flood Insurance Program (NFIP) which is a part of the Federal government and FEMA. People are actually sometimes a little taken aback that it could cost them so much less to obtain a flood insurance policy with similar (and often times more expansive) coverage. The unfortunate truth the question of why is NFIP insurance so expensive is because there are some fatal flaws within the NFIP program, which I will explain below.
Why is NFIP insurance so expensive? Why is private flood insurance cheaper?
When the National Flood insurance program was introduced in 1968 after the passing of the National Flood Insurance act of 1968, the program was never meant to be a long term solution to the problem of those living in flood prone areas. The program currently insures around 5 million homes, most of which are located in Texas and Florida, but there are homes in all 50 states covered by this type of federal insurance.
While the NFIP was solvent from 2004 from the collection of flood insurance premiums, massive disasters such as hurricane Katrina and Hurricane Sandy have put the NFIP in the red, and as of August 2017 the NFIP program currently sits at over $25 billion dollars in debt. This is partly because the NFIP cannot pick and choose which properties it will cover, and many policy holders that have never flooded are effectively subsidizing properties that have received repeated flood events, pushing premiums higher and higher each year. This has become a major criticism of the program, as critics cite that the NFIP encourages building and rebuilding in vulnerable areas.
If you haven’t seen it, you should certainly watch this clip from Last week Tonight with John Oliver which talks about the National Flood Insurance Program and its flaws.
So why is private flood insurance cheaper?
Surely you are thinking OK, then how can a private flood insurance policy be more reasonably priced than the NFIP? The answer to this is that the private underwriting guidelines are different from the NFIP’s, and really depend on the carrier that is under writing the policy. Not all risks are accepted for private flood insurance, and because the private companies are more stringent in their risk assessment that allows the pool of risk to be thinned out a bit and allows us to offer lower premiums to policy holders. Most people only buy flood insurance because they are mandated to by their mortgage company when a home or structure is located within a 100 year flood zone (or A zone) but in reality every homeowner should carry at least some flood insurance to mitigate risk – because almost a third of flooding damages occur in the “low” risk zones. If you’re looking to buy a home in a flood plain, or you currently have NFIP insurance and want to see if you could roll it over into a private policy, fill out the form below and we’ll get in touch with you.