Flood insurance

Flood insurance

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Flood insurance denotes the specific insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

 coverage against property loss from flood
Flood
A flood is an overflow of an expanse of water that submerges land. The EU Floods directive defines a flood as a temporary covering by water of land not normally covered by water...

ing. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowland
Lowland
In physical geography, a lowland is any broad expanse of land with a general low level. The term is thus applied to the landward portion of the upward slope from oceanic depths to continental highlands, to a region of depression in the interior of a mountainous region, to a plain of denudation, or...

s, floodplain
Floodplain
A floodplain, or flood plain, is a flat or nearly flat land adjacent a stream or river that stretches from the banks of its channel to the base of the enclosing valley walls and experiences flooding during periods of high discharge...

s and floodways that are susceptible to flooding.

Hidden floods



Nationwide, only 20% of American homes at risk for floods are covered by flood insurance. Private insurers are unable to insure against the peril of flood due to the prevalence of adverse selection
Adverse selection
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information : the "bad" products or services are more likely to be...

, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss. Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that insurers are unable to cover their costs in flood insurance.

In certain flood-prone areas, the Federal Government requires flood insurance to secure mortgage loans backed by federal agencies such as the FHA and VA. However, the program has never worked as insurance, because of adverse selection. It has never priced people out of living in very risky areas by charging an appropriate premium, instead, too few places are included in the must-insure category, and premiums are artificially low." The lack of flood insurance can be detrimental to many homeowners who may discover only after the damage has been done that their standard insurance policies do not cover flooding.

Flooding is defined by the National Flood Insurance Program as a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties (at least one of which is your property) from: Overflow of inland waters, unusual and rapid accumulation or runoff of surface waters from ANY SOURCE, and mudflows.

This can be brought on by landslides, a hurricane, earthquakes, or other natural disasters that influence flooding, but while a homeowner may, for example, have earthquake coverage, that coverage may not cover floods as a result of earthquakes.

In the United States


Insurers in the US do not provide flood insurance coverage due to the hazard of flood typically being confined to a few areas. As a result, it is an unacceptable risk due to the inability to spread the risk on a wide enough population to absorb the potential catastrophic nature of the hazard. In response to this, the federal government created the National Flood Insurance Program
National Flood Insurance Program
The National Flood Insurance Program is a program created by the Congress of the United States in 1968 through the National Flood Insurance Act of 1968 . The program enables property owners in participating communities to purchase insurance protection from the government against losses from flooding...

 in 1968.

The National Association of Insurance Commissioners (NAIC) found that 33 percent of U.S. heads of household still hold the false belief that flood damage is covered by a standard homeowners policy. FEMA
Federal Emergency Management Agency
The Federal Emergency Management Agency is an agency of the United States Department of Homeland Security, initially created by Presidential Reorganization Plan No. 1 of 1978 and implemented by two Executive Orders...

states approximately 50% of low flood zone risk borrowers think they are ineligible and cannot buy flood insurance. Anyone can buy flood insurance as long as their community participates in the NFIP, even renters. However, unless one lives in a designated floodplain and is required under the terms of a mortgage to purchase flood insurance, flood insurance does not go into effect until 30 days after the policy is first purchased.

If you are eligible, you must purchase a separate flood insurance policy through an insurance company that participates in the National Flood Insurance Program (NFIP). Flood insurance is available for residents of approximately 19,000 communities nationwide.

In the United Kingdom


Usually, the British insurers require from clients living in Flood Risk Areas to flood-proof their homes or face much higher premiums and excesses.