Flood insurance is broken. You can fix it.

Hurricane Harvey is a tragedy. One college friend who lost his house completely, and another the roof, floors and drywall. Both are wonderful men, Texas Tech graduates. The thought on my mind tonight is flood insurance. I hope they both had it but am afraid to ask either.

As an academic refresher flood insurance provides coverage to a home protecting from water damage caused by natural or manmade floods. This peril is excluded from HO-2, HO-3, HO-4 and HO-5 policies, which is the type of homeowners coverage most of us have. Flood insurance may be optional or forced by a housing lender, based on the odds and severity of your home flooding. This risk is determined by flood plain maps and estimates of catastrophic events. Coverage is capped at $250,000 for residential homes. Tragically, the Consumer Federation of America estimates only two in ten Harvey-affected homeowners had flood insurance on their property.

The program was created in 1968 and intended to be self-sustaining and mimic the mechanics of auto and homeowners policies: charge premiums, invest reserves, pay claims. This program has been quietly spiraling out of control. The national flood insurance program is quickly running out of money. An article on Quartz today has the national flood insurance program 25 Billion (with a B) dollars in debt. Legislatively it can only borrow another 5.8 Billion to pay out claims. Somewhere around 5 Million policies are in place and almost 9% of those are in counties within Texas and Louisiana that may be impacted from this storm.

A flaw with the entire program is that flood plain maps do not reflect climate change or damage from previous storms to infrastructure and coastline. These outdated maps and assumptions paint a false picture of true risk. Without true risk, fewer lenders force coverage and without accurate predication mechanisms flood insurance premiums are absurdly low.

Our flood insurance market is a bubble similar to the 2008 mortgage crisis, only with more deadly outcomes. Mispriced risks, homes that don’t have protection when homeowners may think they do. Our flood insurance model is broken.

A shored up system will require more sophisticated risk pricing that takes into account climate change, population surges and aging infrastructure. Premiums should increase dramatically. Increase to a point where we are accurately assessing living near coastal areas and rivers. Alternatively, we could force all homeowners to pay into the pool and take advantage of the law of large numbers. Perhaps a combination of both methods.

Whatever the fix is, it must include lenders mandating coverage. I can’t even get my mind around the idea of evacuating everything I know in a boat with my family, not realizing that decades of my life just washed away. And as a lender, how is that conversation going to happen compassionately? Call up the borrower who just lost everything and demand immediate default payment of their mortgage?

Talk with your insurance companies and state insurance bodies. Use your knowledge as financial planners to educate all of your clients about flood insurance. This kind of event should empower us to do better. You earned a CLU, ChFC or CFP® and understand these risks. Use that knowledge to help your clients as often as you can.

https://www.usatoday.com/story/money/2017/08/29/hurricane-harvey-houston-flood-insurance-damages-claims/611910001/

https://qz.com/1064109/is-the-national-flood-insurance-program-running-out-of-money/

http://www.marketwatch.com/story/harveys-ravaging-of-houston-is-perfect-reason-to-kill-the-flood-insurance-program-2017-08-30