Why flooding should be a covered cause of loss in property insurance
There’s something fun about considering flood insurance when the ground outside the office is so saturated it’s like walking on sponges. No. We don’t have flooding and even if it did, chances are most property policies around us will rule it out and an even greater chance no one near me will. have a flood policy on their property.
This last thought is exactly why property insurers (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 identical but very close, so let’s work with it.)
Water – This means: flood, surface water, waves including tidal wave and tsunami, tides, tidal water, overflow of any body of water or spray from any of them, all carried or not by the wind, including storm surges;…
I would recommend that some carriers, especially a well-capitalized Florida carrier, have the courage to change their water exclusion to make flooding a covered cause of loss. I am not suggesting that a carrier should make this an available option. Add it to the policy. Flood cover similar to how other causes of loss are covered.
Floods can be taken out against. In 1968, when the National Flood Insurance Program was created, some data helped the new agency assess flood risk for regions of the country, but this data was limited in scope, accuracy, and details.
More than 50 years later, terabytes of data are available to assess the risk of flooding at a given location.
Today, we can search the Special Hazard Flood Zone (SHFZ) for any location in the United States (except non-participating communities). FEMA has loaded its FIRMs (Flood Insurance Rate Maps) onto its site, and anyone can look up an address to determine its location relative to any flood zone.
That’s 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 underwriter to determine how close a location is to a body of water and show the underwriter what type of construction has been built in the area.
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 considered, and that is the topographic map. The more vertical distance there is between an assured location and a body of water, the less likely it is that water will rise high 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 may have flooded in some way over the years.
It sounds like a lot of information to try to gather, but this is a time when gathering data and making it tell a story is big business. You honestly don’t believe there’s anyone out there who isn’t using all that data to tell a flood story, do you?
Per-peril pricing provides a means of pricing in the event of a flood. Today, more carriers in more states are filing a property risk rating in both the homeowner and commercial real estate markets. Per-peril pricing allows the carrier to divide the premium by certain named perils, such as fire, wind, flood, etc.
By using a per-peril rating system, the insured can accurately assess flood risk 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, i.e. if you have a 20 story commercial building, only the first floor or two are likely to be flooded. The whole building could be in danger, but that’s not the situation here.
Now use the fire rate (or wind if you wish) for that building, multiply it by a modifier based on the true flood risk for the location. The actual flood risk of this location includes the Special Flood Hazard Zone (SHFZ), the number of flood events that have occurred in the last 10-20 years, the distance to any plane of water, the size of that body of water, the elevation difference between the location and that body of water, and probably something else that I’m not thinking of.
This is a good place to remind you that I’m not an actuary, but I have an idea or two about what should go into a rate modifier and what makes a good rate.
By using multiple data points, a reasonable rate of flooding can be created for each location, which should then generate the appropriate premium for the risk.
Yes, that means those with higher risk will pay more, but isn’t that one of the working principles of insurance?
Someone already knows how to write it in a policy. In a perfect world, you could just edit the water exclusions to remove references to flooding, but it’s not that simple. It’s a good thing the ISO and insurance companies have been writing their own flood endorsements for the past few years.
One solution might be to modify the water exclusion to provide coverage in the event of flooding. 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 defined flood exclusion.
While we review potential policy considerations, this is a good place for a carrier to use a different deductible. They might add a flood deductible if the location is in a high risk area. The deductible could be similar to the hurricane deductible in Florida, which is often written with a percentage of the replacement cost of the property.
Catastrophic risks are already insured. The ideally insurable risk is a risk where there are a large number of similar units of exposure. This allows us to predict the true costs of potential losses from an individual risk. The loss must be accidental, unintentional, measurable and calculable. The ideally insurable risk should also not be catastrophic.
This means that the risk should not suffer a particular loss when a large number of similar risks suffer the same loss. That’s like saying you shouldn’t insure against a hurricane because an entire city could experience the same hurricane. As you already know, we insure against hurricanes and other catastrophic losses. Flooding is no different.
This is possible in part because not all locations are exposed to all possible catastrophic events. One company may have risky locations while others are not. Several insurance companies have written about buildings that were impacted by Hurricane Michael, and not all buildings that have been written about by any of these companies have been impacted. The same is true in the event of a flood.
An insurer that chooses to add flooding as a covered cause of loss for all of its policies is doing something that makes perfect sense in the insurance world. It spreads the risk over a large enough group of buildings that the risk to each is relatively low, even though a flood has the potential to be a catastrophic event.
Floods were a covered cause of loss before insurance companies decided they were too risky after some floods in the early 20th century. 100 years later, it’s time flooding became a covered loss cause in most cases. We will allow certain companies that write the extremely risky location to exclude flooding, but only if there is a robust residual market in that state.
Property flooded with loss of profit