Flood Insurance

Different kinds of natural hazards like earthquake, cyclones and floods cause loss to life as well as property.  It can be said that floods cause more damage than any other natural phenomenon.  The reasons for flooding could be heavy rainfall, cyclones and hurricanes or even tsunamis. People living in flood prone areas suffer huge losses when their homes or offices are flooded.  By taking flood insurance, these people can mitigate their losses.

Cost of Buying Flood Insurance

An insurer offering flood insurance would fix the premium rates for a particular policy taking into account certain factors-

  • Is the area flood prone?

When a person applies for flood insurance, the insurance company first refers to topographical maps to find out whether the place is a lowland or a plain which floods easily.  People in a flood prone locality would have to pay more for flood insurance than those living in places where the risk from floods is minimal.  Flood insurance costs are comparatively low for buildings at elevated levels and structures which are flood resistant.

  • What kind of insurance coverage does the applicant want?

There are basically two types of flood insurance coverage-

  • Building property coverage – A person opting for this coverage would be indemnified by the insurance company for damage to the building in case of flood.  This would also cover the electric and plumbing system of the building, central heating and air conditioning system and so on. 
  • Personal property coverage – If the insured has taken personal property coverage, then he would be compensated by the insurance company for loss or damage to his personal belongings due to flooding.  This would cover items like furniture, clothing, electronic gadgets and so on. 

In addition to the above, the amount of insurance wished to be taken will also determine the premium to be paid.

Points to be noted regarding flood insurance

  • Flood insurance offers protection for loss caused by flooding of houses, apartments and even commercial buildings.
  • In traditional insurance, the number of people taking insurance is large whereas the number of claims are few.  The insurer is able to profit as the number of payouts is much less than the premium collected.  But in the case of flood insurance we get to see ‘adverse selection’.  This means that generally only the people who are at risk from floods take this insurance.  The ratio of number of claims to policyholders is very high and the insurers may end up paying more than they receive through premiums.  This makes the business unviable making it difficult for private insurers to offer this insurance.
  • Many people wrongly assume that if they are covered for natural disasters like earth quake and cyclone, they are automatically covered for even floods caused by such events.  But generally, insurance will not cover flooding and separate flood insurance needs to be taken.

Exclusions in Flood Insurance Policies

  • Personal property coverage in flood insurance does not include cash and jewelry of the insured.
  • Loss caused by moisture, mold and mildew will not be indemnified by the insurer as the person holding the policy can take precautions against the same.
  • Swimming pools, fences, plants located outside the building are not covered by flood insurance.

In the U.S., one can buy flood insurance through the federal government’s National Flood Insurance Program (NFIP).  In fact, people living in high risk areas like the coastal line cannot take mortgage loans unless the property is covered by flood insurance.

While flood insurance programs arranged by the government would be cheap because of subsidies, ‘adverse selection’ makes flood insurance offered by private insurers quite expensive.  Often, claims are rejected by insurance companies on some pretext or the other.  Flood insurance would become inexpensive for the insured and profitable for the insurer only if a large number of people with comparatively low risk also take flood insurance.