Flood insurance

Does anyone out there have flood insurance?

Ninety-four years ago, my grandfather purchased waterfront property on Buzzards Bay, Massachusetts. In that time, we have suffered through three devastating hurricanes without flood insurance. In today’s prices, each hurricane did about $30,000 worth of damage. My insurance company values all the buildings at $250k. Without flood insurance, I pay about $950 per year for insurance.

FEMA has recently come out with some “new” maps which puts us in a “high risk” area for floods. Just for grins, I called my insurance company. Flood insurance, with a $5000 deductible, would cost $30,000 per year and that would not cover contents (such as the furnace in the basement). Where did their actuaries learn math? They’re predicting a total loss every 8 years or so??? Now, I’m using the high insurance premium to fight my property assessment. Is there anything one can do to bring FEMA into reality?

My opinion is that FEMA, after about 30 years, has finally begun to realize the reality of their flood exposure and have actuarialized premiums commensurate to the risk of loss, not for your individual structure but for all structures they may insure in your geographical area when, not if, the next weather event pushes water up Buzzards Bay. Your far less costly homeowner’s premium is based on an insurance principle of insuring against a risk of loss against insured perils as opposed to more of a certainty of loss from an HO policy excluded flood loss.

In years past, flood premiums were relatively inexpensive when one considers their loss ratio (premiums earned vs claims paid) was usually in the red and a real insurance company would have filed bankruptcy because unlike FEMA (actually The National Flood Insurance Program or NFIP), private insurers do not have taxpayers as their fallback underwriters if they run out of money.

I understand the high NFIP annual premium but I support your efforts to use this as leverage to reduce your property assessment.

Did you give FEMA the resale value of the properties or the rebuild cost?

If your insurance is going to cost $30k per year, and your historical incidence rate is about $30k of damage every 10-15 years or so, then it sounds like you should be self insured. Why pay the insurance company exorbitant premiums, when you could just sock away $5k per year and have more than enough set aside to cover damage when and if it occurs.

I am. As the property has been family owned for 90+ years, I’m lucky to own it outright. A mortgagor might require me to carry insurance.

I understand that FEMA wants flood insurance premiums to statistically cover the risk. However, in my case, they are expecting the property to be completely destroyed ever 7 years or so even though it has stood for 90+ years.

This reminds me of a dental insurance policy that I looked into when I retired. It was $75 per month ($900 per year). It paid 60% of all dental work over $100, up to a maximum of $1500 per year. In reality, the most I was getting was $600 worth of coverage ($1500-$900), with a likelihood of getting nothing (other than two cleanings) if my dental health was normal.

Flood insurance, like real estate values is all about location, location, location. Since hurricanes tend to run up the coast pushing water ahead of them, a hurricane nearing Buzzard’s Bay (with the mouth of your bay open to the south), may cause flood loss in the billions of dollars.

Here’s a hypothetical. Imagine you are an insurance company insuring 50 homes in Buzzard’s Bay against flood loss with policy limits at $250k each meaning your exposure for only one weather event is $12.5 mil and you face the possibility of paying out that amount within one year. At $30K per home the annual premium amounts to $1.5 mil leaving a potential loss of $11 mil in year one that will come out of your pocket.

How much of a premium would you charge each homeowner? Now I understand you are not an insurance company with billions in assets but when evaluating risk and financial exposure, actuaries evaluate the risk scenario in a similar manner.

Comparing that dental coverage to flood insurance, I believe is apples and oranges.

They might also be considering a higher than historical incidence of hurricanes, due to global warming.

Yes I do have FEMA flood insurance. Doubtful that the tax assessor is going to give you any relief for premiums that you are not actually paying. They would most likely not take it into account until you either sold the property or started paying FEMA premiums (like if you mortgaged the property).

I’m trying to bring FEMA into reality right now; it’s an uphill battle and it’s doubtful that they will be swayed by my arguments. They placed my home in a flood plane because the levy upstream was in need of repair. And even though the levy was repaired to their satisfaction they have yet to consider removing me and my neighbors from their maps.

When one buys insurance, one pays a premium and the insurance company assumes a risk. I was comparing those two particular policies because each was assuming little risk. The dental policy assumed a maximum of $600 in risk for a $900 premium. In the case of the flood insurance, they’re assuming a total loss every seven years despite the fact that in 94 years of ownership, the total flood loss has been less than three years premium.

Whether I’m paying the premiums or not is irrelevant. Property assessment is based on fair-market value. The potentially high premiums which would be borne by a purchaser greatly reduces the value of the property. Even if I limit myself to cash buyers who do not buy insurance, I have effectively lowered the pool of buyers which lowers the sales price which lowers the value.

Remember that there is a flip side to FEMA having the taxpayers to fall back on, these high premiums are not due to FEMA suddenly deciding to make money. They are due to congressional action-a law-that requires FEMA to set these rates. Trying to talk ‘sense’ into FEMA is as pointless as arguing with the cashier about the high price of clothes at a store. You have to talk to the people in charge-congress. And congress is going to ask if you agree to large continuing subsidies to people who build in vulnerable coastal areas. Implied will be whether congress should continue to support farm subsidies or food stamps or nuclear power insurance or…

I know that many people argue that FEMA misapplied the rules and they should consider some factor. That may be the case. But remember, they do this for a living. They don’t make nearly as many mistakes as people like to hope they do.

Whether it is good public policy to render essentially worthless 100’s of billions of dollars of private property around the country is a topic worthy of debate. But don’t blame FEMA-that is what congress is hoping you will do!

I believe your comparison is apples and oranges because these policies are dissimilar per your description above. Although you say each policy assumes little risk, in reality the dental policy assumes absolutely no risk because regardless of the circumstances, the company will always net $300 annually, in perpetuity. In my opinion, this is not an insurance policy because it doesn’t insure against loss because the policyholder will always sustain an annual loss of at least $300. This is more of a maintenance agreement seeking fools as policyholders and I understand why you passed on it.