Natural catastrophes that occur on massive scales are beyond the abilities of regular insurance companies. Flooding is one catastrophic event that we face. Floods tend to occur on a large scale. During a single occurrence it often causes damage to not only one, but hundreds or even thousands of homes.
Flood coverage for homes and businesses are available under the umbrella of the Department of Homeland Security; which oversees the Federal Emergency Management Agency. In the following years after the devastation caused by Hurricane Katrina, the federal government’s flood program fell into billions of dollars in debt. The rates that policyholders are charged are highly subsidized by U.S. taxpayers. The program lacks sufficient premiums which are accompanied by other problems such as:
- Adverse selection – coverage is purchased primarily by those with the very highest likelihood of loss
- Communities that are supposed to help reduce losses by following building code strategies fail to enforce their laws
- The trend continues of persons migrating to and building increasingly expensive homes areas prone to flooding
Another ongoing problem is that less than five percent of homes insured under the program cause a disproportionate share of losses. They are labeled as Repetitive Loss Structures, which refers to property located in areas that are highly prone to floods and which have suffered several major losses within a certain timeframe. These homes have been subject to new flood program rules that required such buildings to undergo loss mitigation after a given number of losses. However, instead of owners being required to add features to minimize flood damage; homes are repaired and/or rebuilt to its previous structure.
Billions of dollars continue to be spent on homes that undergo repeated loss. In essence, the flood program is being “flooded” by the lack of action and enforcement by individual property owners and their communities.
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