GCN Exclusive Report

Breaking The Bank

The Case For Changing The Insurance Model

Part Three

By Mark Proulx and Perry Hicks- Special to GCN   Filed 1/8/06

Private insurance was never meant to handle mega-catastrophes. Thus, the Federal Government has had to heavily involve itself in insuring against natural disasters. Although usurping flood insurance regulation would once again encroach upon state’s rights, having one large federal program would also centralize regulatory authority in insurance – a really good idea in some markets losing their ability to be insured, such as Florida. Besides, it is the Federal Government that underwrites private flood insurance, anyway. 

“A national insurance policy is the only way to effectively deal with the financial ruin caused by these incredible catastrophes,” said California Insurance Commissioner John Garamendi, who has long advocated for the creation of such a policy. “It’s time to stop wasting federal emergency funds and bring effective, affordable catastrophe coverage to our nation.”

Realize also, the scope of catastrophic insurance is not limited to just flooding. According to the Insurance Information Institute, “The number of natural and man-made catastrophes has been increasing on a global scale for the last 20 years. There has been a huge increase in the insured value of global catastrophic losses [since 1990.] 2005 will be by far the worst year ever for insured catastrophic losses in the US by more than twice 2004’s record.” And these numbers only include business and personal property claims, business interruption and auto claims! 

There is no question that in the wake of the woefully inadequate federal management and lack of private insurance coverage to this, and likely future - mega-catastrophes, the debate on this must begin immediately.

Besides the Southeast and Gulf Coast states that are always in jeopardy of hurricanes and tropical storms, the Northeast can be affected by both the remnants of tropical disturbances in the summer and hurricanes, winter flooding, nor’easters and the threat of rapid spring melts; the Midwest can experience major river flooding as illustrated by the catastrophic floods as in 1993; and the West Coast can has seen intense flooding spanning the months of November through March, resulting in millions of dollars in damage for residents each year. 

Accordingly, nearly all Americans should prepare for flooding and catastrophic events no matter where they live. For most of us, the principle preparatory action is to buy flood insurance. Without flood insurance, homeowners are left completely unprotected because their other homeowner policy protects only against fire, wind, and accidental damage. In insurance industry parlance, it is called “flood exclusion.”

Flood Exclusions

Flood exclusions have existed in homeowner policies for decades. Flood exclusion is effectively absolute- excluding water under all circumstances. It is the reason FEMA’s National Flood Insurance Program (NFIP) was established in back in 1968 and it has been approved by insurance regulators in all 50 states. Except for those areas designated as flood plain, purchase of flood insurance is purely voluntary.

Many consumers think that flooding related to hurricanes and other tropical disturbances are limited to coastal areas, hence, they do not purchase flood insurance. However, some of the most damaging flooding can happen well inland and days after a storm makes its initial landfall.

In 2004, Pennsylvania – which has no ocean coastline – received more than $175 million in flood insurance payments, second only to Florida. In fact, according to the NFIP numbers, there are more total flood insurance policies written for the State of Illinois than there are for Mississippi.


To spread the cost across wider area and so greatly lower individual costs, the Insurance Information Institute (http://www.iii.org/media/about/) has recently proposed a nationwide program be adopted that would include having every household of every state pay into a unified program that would cover catastrophic losses, such as those of Hurricane Katrina, and likely future events of all kinds. It’s a sound suggestion and one well worth examining.

Congress would have to establish such a fund, but federal lawmakers have balked at similar proposals in the past. Lawmakers in states not prone to natural disasters don't want their residents subsidizing a fund that covers residents in states such as Florida and California. After all, people shouldn’t live there if it is a dangerous storm-prone area, should they?

A Short Flood Insurance History:


Summer Flooding: Southeast Hurricane, Season 2004

Five hurricanes struck within a six-week period

Flood insurance payments totaled over $850 million as a result of the five storms

Hurricane flooding resulted in over 28,000 paid losses


Autumn Flooding: Central Texas, October 1998

60 Texas counties reported flooding between October 17-19, 1998

12,000 homes, 700 businesses and public property were damaged as a result of flooding

Flooding caused over $900 million in damages


Winter Flooding: California, January 1997

Almost $400 million paid out as a result of a two-week flooding event

Total losses for the winter totaled over $50 million

Over 2,000 paid losses during the winter season


Spring/Summer Flooding: Midwest, May-September 1993

Nine state affected

50,000 homes destroyed

75 communities completely submerged

Flooding caused between $12-$16 billion in property damages

The Importance of Catastrophic Insurance That Includes Flood

One thing is certain; most people have no clue as to how they, living in so-called “safe states,” are affected by flooding and the insurance industry as a whole. In fact, it is only now evident to those living in the aftermath of the Katrina disaster, how unprepared they were for what the insurance companies would do when faced with such enormous devastation.

Regular home insurance covers most calamities other than flood. The reason is simple, floods inflict massive damage, not to just a single structure, not to just a single neighborhood, but over vast regions that may mean far more than the confines of even a city.

If the structure survives, consider how quickly the costs of damage can add up by examining the following chart (courtesy of www.floodsmart.gov.) To gage the impact of Katrina, multiply the total costs by hundreds of thousands of homes.




Total Losses


Replace Drywall 
New Baseboard Molding 
Replace Carpet and Flooring 
Labor, Materials, Clean Up 
New Floor-Standing Bookshelves & Lamps




Replace Some Furniture 
New Computer CPU and Some Accessories 
Replace Some CDs and Books 
Repainting Interior and Supplies




Replace Some Kitchen and Bath Cabinetry 
New Kitchen Appliances  
Replace Living Room Furniture 
Clean Exterior




Major Repairs to Furnace and A/C 
Replace Portions of the Electrical System




Replace Warped or Broken Doors 
New TV, VCR/DVD Player, Stereo 
Major Loss of Personal Items: Clothing, Shoes, Toys, Photo Albums 
Repaint Exterior – Paint and Supplies



As the above examples illustrate, most people are not aware of damages outside of their immediate concern. According to the Insurance Information Institute, flooding, by a wide margin, is the number one cause of property damage claimed by homeowners across the United States. So, why haven’t homeowners across the country rallied, petitioned, protested and forced the flooding issue back onto the homeowner’s insurance policies?

If, in the expert opinion of the Insurance Information Institute, the United States is looking at a $20 billion event every 10-12 years on average, how many more events can our insurance industry – regardless of how well insulated by reinsurers – survive?

The United States has to start realizing that its survival depends on a plan to replace the homeowner’s insurance industry- not supplement it.

Breaking the Bank Part 1: It May be Time to Rethink Hurricane Insurance


Breaking the Bank Part 2: Why the Current Insurance Model Doesn't Work