The U.S. National Flood Insurance Program isn’t the only game in town

Whenever the subject of overland flood insurance for Canadian homeowners comes up, someone invariably will warn against it by bringing up the spectre of the U.S. National Flood Insurance Program.

This is somewhat understandable.

Insurance premiums for NFIP coverage are not risk-based. Further, the program is largely voluntary (notwithstanding requirements from mortgage lenders that borrowers buy flood insurance). These two things (as well as a number of other problem areas, including lack of mutuality) ensure that whenever a large flood event occurs (as with Katrina or Sandy) the U.S. government pays out far more in flood claims than it takes in in premiums. Currently, the NFIP is in debt to the tune of somewhere around $25 billion. A private insurer with that much red ink would no longer be in business.

In our November 2010 report ‘Making flood insurable for Canadian homeowners’ (with Swiss Re), we noted: “It has been reported that due to the nature of the NFIP, it is not able to handle large loss events. The US Government Accountability Office (GAO) stated: ‘The NFIP, by design, is not actuarially sound because Congress authorized subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program and premiums were based on the average historical loss year, therefore the NFIP does not build sufficient reserves to cover losses that exceed the historic averages.’ (GAO, 2007).

Recently, U.S. Congress blocked attempts to move the NFIP to actuarial, risk-based pricing and the President signed the bill, meaning status quo for the NFIP until at least 2017.

For many, it’s as though there is only one (and can be only one) flood insurance program for homeowners and the NFIP is it.

Seldom do detractors and sceptics of flood insurance speak of any other flood insurance regime. Perhaps because of its infamy, because Canadians often watch U.S. news, or because we often see advertisements for the NFIP on U.S. television, it seems to be the only system that people are at least somewhat familiar with. As a result, many Canadians see the NFIP as the only prototype for food insurance, and this is unfortunate.

The reality is that there are scores of flood insurance regimes around the world. For instance, while Canada is the only G8 country where insurance for overland flood is not widely available to homeowners, it appears also to be the only G20 country as well. The G20 is made up of 19 countries plus the European Union for a total of 47 states, and each of these developed industrialized economies has its own unique flood insurance program (and Switzerland has two!). As we wrote in our study with Swiss Re “Generally, international insurance models can be placed under four categories: public and bundled  (e.g., Spain and France), public and optional (e.g., United States), private and bundled  (e.g., United Kingdom and Switzerland), and private and optional (e.g., Germany).” No two of these flood insurance systems are alike, ensuring that there is a wide array of possibilities.

Many mid to low income developing countries also have flood insurance programs, with one study looking at no fewer than 27 of them.

So to point at the NFIP as being the only example of flood insurance is wildly off the mark and, when done intentionally, greatly disingenuous.