Why flooding should be a covered cause of loss in property insurance
There’s something fun about considering flood insurance when the floor outside the office is so saturated it’s like walking on sponges. No. We don’t have a flood event and even if it did, chances are most real estate policies around us will exclude it and even more likely that no one near me will. have a flood policy on their property.
This final thought is exactly why insurers of property (whether commercial property or homeowners) should include flooding as a covered cause of loss.
If you were to consult ISO HO 00 03 05 11 Owners 3 – Special form, or ISO CP 10 30 09 17 Causes of loss – Special form, you would see this exclusion. (That’s not all, and they’re not the same but very close, so let’s work with them.)
Water – This means: Floods, surface water, waves, including tidal wave and tsunami, tides, tides, overflow of any body of water or spray from any of them, all of which may or may not be driven by the water. wind, including storm surges;…
I would recommend some carriers, especially a well capitalized Florida carrier, have the courage to change their water exclusion to make flooding a covered loss cause. I’m not suggesting that a carrier should make this an available option. Add it to the strategy. Cover flooding the same way other causes of loss are covered.
The flood can be taken out against. In 1968, when the National Flood Insurance Program was established, there was data that helped the new agency assess flood risk for areas of the country, but this data was limited in scope, precision and detail.
More than 50 years later, terabytes of data are available to assess the risk of flooding in a given location.
Today, we can search the Special Risk Flood Zone (SHFZ) for any location in the United States (except non-participating communities). FEMA has uploaded its FIRMs (Flood Insurance Rate Maps) to its site, and anyone can search for an address to determine its location in relation to flood zones.
This is not enough information to really guarantee a location for its flood potential. If you look at the DFIRM (Digital FIRM), it’s not just the flood zones to see. This map can be compared to other aerial images. This comparison would allow the insurer to determine how close a location is to a body of water and show them what type of building has been constructed in the area.
A new building, whether it’s building more buildings or making paved surfaces, changes the dynamics of where the water will go next.
There is another map that can be viewed, and that is the topographic map. The greater the vertical distance between an assured location and a body of water, the less likely it is that the water will rise enough to impact the building.
There are also over 50 years of weather data to consider. We can find out how much rain a place receives and how many times that place has been flooded in one way or another over the years.
It sounds like a lot of information to try to put together, but this is a time when collecting data and having them tell a story is big business. Honestly, you don’t believe that there isn’t anyone out there who isn’t using all of this data to tell a flood story, right?
Peril Rating provides a way to assess flooding. Today, more and more carriers in more states are filing a risk assessment for property in the homeowners and commercial real estate markets. Risk-based pricing allows the carrier to distribute the premium based on certain named risks, such as fire, wind, flood, etc.
Using a risk-based pricing system, the insured can accurately assess the risk of flooding and note the impact on the insured’s final premium.
How would that work? Take the replacement cost of what is actually at risk of flooding, that is, if you have a 20 story commercial building, only the first floor or both are likely to be flooded. The whole building may be in danger, but that is not the case here.
Now use the rate of fire (or wind if you want) for that building, multiply that by a modifier based on the actual flood risk for the location. The true flood risk of this location includes the Special Risk Flood Zone (SHFZ), the number of flood events that have occurred in the past 10-20 years, the distance to any plane from water, the size of that body of water, the difference in elevation between the location and that body of water, and probably something else I’m not thinking of.
It’s a good place to remind you that I’m not an actuary, but I have a couple of ideas on what should go into a rate modifier and what constitutes a good rate.
By using multiple data points, a reasonable flood rate can be created for each location, which in turn should generate the appropriate premium for the risk.
Yes, that means those with higher risk will pay more, but isn’t that one of the principles on which insurance works?
Someone already knows how to put it in a policy. In a perfect world, you could just change the water exclusions to remove references to flooding, but it’s not that simple. It’s a good thing ISO and insurance companies have been writing their own flood endorsements for the past few years.
One solution could be to modify the water exclusion to cover a flood. This could be done by removing words, such as flood, surface water, or overflow from any body of water. Another option could be to add an exception to the exclusion for defined floods.
While we are looking at potential political considerations, this is a good place for a carrier to use a different franchise. They could add a flood deductible if the location is in a higher risk area. The deductible could be similar to the Florida hurricane franchise, which is often written with a percentage of the property’s replacement cost.
Catastrophic risks are already insured. The ideally insurable risk is a risk where there are a large number of similar exposure units. This allows us to predict the actual potential loss costs of an individual risk. The loss must be accidental, unintentional, measurable and calculable. The ideally insurable risk should not be catastrophic either.
This means that the risk should not be subject to a particular loss when a large number of similar risks are subject to the same loss. This is like saying that you should not insure against a hurricane because an entire city could be subjected to the same hurricane. As you already know, we insure against hurricanes and other catastrophic losses. The flood is no different.
This is possible in part because not all locations are exposed to all possible catastrophic events. A business may have some risky locations while others are not. Several insurance companies have underwritten buildings that were affected by Hurricane Michael, and not all buildings that were underwritten by one of these companies were affected. The same is true for floods.
A carrier that chooses to add flooding as a covered cause of loss on all of its policies is doing something that is perfectly healthy in the insurance world. It extends the risk to a group of buildings large enough that the risk to each is relatively low, even though the flood has the potential to be a catastrophic event.
Flooding was a covered cause of loss before insurance companies decided it was too risky after flooding in the early 20th century. It’s 100 years later, and it’s time for flooding to be a covered cause of loss in most cases. We will allow some companies writing the extremely risky location to exclude flooding, but only if there is a robust residual market in that state.
Profit loss flood property