While the National Flood Insurance Program (NFIP) being inundated with thousands of new claims following Hurricane Irene’s storm surge, a new report by Swiss Re charges that the U.S. system for covering flood losses is “economically not sustainable” and filled with underwriting and financial problems.
The NFIP does not correctly estimate the “accumulation of risk from storm surge,” the Swiss Re report says, adding that the system’s surge failings were “demonstrated when Hurricane Katrina hit New Orleans in 2005.”
Following Hurricane Katrina the NFIP paid out $17.5 billion to cover 162,000 claims, mostly from homes destroyed from storm surge, according to a 2006 General Accounting Office report. As a result of the losses NFIP was forced to borrow $20.8 billion from the U.S. Treasury to cover claims.
The U.S. flood insurance program is currently facing additional significant storm surge losses following last month’s Hurricane Isaac, with “thousands’ of water damage claims being reported within New Orleans alone. according to an Associated Press report.
Beyond the NFIP’s inability to correctly underwrite storm surge losses, the program also “promotes, rather than limits” broader adverse selection since those at greatest risk for loss are more likely to purchase cover and stifle profitability.
“Only those homeowners with a mortgage and a home that is in a 100-year-zone are obliged to buy flood insurance,” the report says. “That means the premiums are inadequate and too high for those living on the border of a 100-year-zone. At the same time they are too cheap for those living in areas exposed to higher flood risk.” The report adds that the “vast majority of homeowners” outside of flood zones choose not to purchase flood coverage despite a significant federal subsidy.
“The NFIP has debts of USD 18 billion and is economically not sustainable,” the report adds “For all of these reasons, reforms to the NFIP are regularly placed on the political agenda and include concepts for privatizing flood insurance in the United States.”
The full Swiss Re report titled Flood – an underestimated risk: inspect, inform, insure can be found here.
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