Are We Under Water with Our Approach to Flood Insurance?

This is serious stuff, the Insurance Elephant thinks- so many people with flooding issues to deal with, so much misery, so much damage, so much avoidance of issues. Flooding is dangerous, disruptive, expensive, frustrating, uncontrollable and seemingly not manageable as risk. Truly a Beast and blind men example like no other, an example of blind men acting insane- approaching the problem the same way every time, expecting a different outcome. Crazy stuff.

               Let’s explore this problem, this seeming insanity dealing with disaster that affects huge swaths of the US. How is the problem perceived, examined, categorized, mitigated, adapted, changed and fixed (or not)?

               At its core flooding is a damage peril like few others. 

It affects entire geographies- buildings, infrastructure, lives, social continuity, productivity, and overall quality of life. There are few ways to prevent flooding- Mother Nature shrugs off our meager efforts. In most part, the Beast considers, we work to manage flooding by moving the risk further down a river or deflecting along a shoreline, we erect dunes to impede actions of waves, install equipment that moves excess water away, and so on. We can’t eliminate the proximate cause of flooding- storms- so we do something to make ourselves feel like we are holding dominion over the flood. 

               It’s noted in history that after the tremendous Mississippi flooding in the 1920’s that flood coverage was removed from typical coverage in homeowner and business policies. Ironically, that event was magnified in its severity by the installation of levee systems that were inconsistent and under-funded.   Huh, thinks the Elephant, we are where we are today because we weren’t clever back then. Flooding was addressed community by community, levees moving the slugs of water down the meanders of the river, becoming a problem for the next burg along the river. And, the persons who suffered the most then are the same who suffer the most now- the residents who are least able to afford preventative efforts, recovery efforts, and planning efforts.

               It took the country fifty years to figure out what to do next- the National Flood Insurance Program (NFIP) came into law in 1968. Fifty years of no recovery plan for flood damage and disruption, five decades of piecemeal response by all sizes of jurisdictions, including the federal government. A darn good summary of how the NFIP got to where it is today is found here, in an article by Samantha Montano and Amanda Savitt.  

               Now we come to a period where significant hurricanes have caused unprecedented flooding in areas where flooding either was unexpected, had recently occurred thus producing a sense of comfort that another bad flood would be unexpected, or have occurred in areas where flooding would be expected- however flooding there was of historic extent.

               How do the many ‘blind men’ perceive the flooding situation? It’s political, it’s sociological, it’s engineering, it’s meteorology, economic development, financial, stubbornness, parochialism, expectation of help, tradition, and in large part, denial.

               Is it even a matter for the Insurance Elephant to consider? Absolutely.  Risk management/sharing is the WD40 that makes property ownership, business operations, transportation, and all other interplays of the economy function. Absent risk management borrowing would not occur in its volume, persons would not be employed, goods would not move from point A to B, tourism would be limited, agriculture would not be at a profitable scale, and so on. So what of flooding and flood insurance? As previously noted flooding as a peril is a unique coverage for real property, and for recent widespread flooding events the overall percentage of properties with flood insurance is less than ten percent, it’s a really big deal. In the absence of flood recoveries what will be the financial engine to prompt what is a business and individual recovery effort needing hundreds of billions of dollars (across three major hurricanes)?

               There are many things that could be discussed that are inequitable with the current flood system, and novel thinking must be employed in addressing these. For example, it’s commonly known that properties are mapped by FEMA/NFIP with an intended outcome of establishing a probability of the respective properties suffering a flood, and associated probability of occurrence. On its face it seems a suitable way to allow risk to be priced for the property (and debated on the mapping’s outcome), but like no other risk a property owner is exposed to the effects of all bad habits, tendencies, poor decisions and weather from everywhere and everybody that is upstream of or around the property.  It’s little wonder that flood insurance participation is so low- property owners have no control of the occurrence, and are subsidizing all the risky behavior that precedes their properties. Do the folks in New Bern, NC, have any control or say of what happens along all 275 miles of the Neuse River? Certainly not, yet after the tidal surge and rising water, they will need to deal with chemical and biological contaminants over which they had no management- even if they wanted to. 

               Flood disasters are not individual disasters, they are community or regional disasters, yet the industry continues to apportion risk individually. In the absence of individual recoveries, what typically happens? Alternate recovery sources are designated (read as ‘government’) that are not tied to individual risks but to individual recoveries. It’s kind of crazy since the pattern repeats itself each time.

               Is it time to take another look at how flood risk is identified, probabilities calculated, risks defined in terms of breadth of an event’s cause, exposure to risk is calculated in terms of regional cost, and cost of risk is apportioned to all across the breadth of area potentially affected? There are plenty of data available and techniques at hand to recalculate relative exposures. Remember- flood disasters are community disasters- even the smart guy living on the hill suffers significant opportunity cost when his lower laying neighbors are affected. Everyone needs to be in the flood insurance boat to allow rising waters to raise, not sink all property owners.

               The Beast wonders if the whole flood insurance program needs to be tossed away and a new animal put in its place, one that has less distinct parts, but is large enough to handle big tasks. Something that has a brain, can problem solve, works well underwater, can navigate complicated terrain, grasps very well and can function even in the absence of an appendage or two. The Flood Insurance Octopus. Welcome to the insurance ecosystem, Octopus.