Insuring Floods: The Most Common and Devastating Natural Catastrophes in America

Flooding is the most common natural catastrophe Americans face, accounting for 90% of all damage caused by natural catastrophes. Hurricanes Katrina and Sandy, for example, collectively caused over $160 billion in damage, but only approximately 10% of the Hurricane Katrina victims and 50% of the Hurricane Sandy victims had insurance to cover their flood losses. Consequently, both their homes and lives were left in ruins in the wake of the storms. Nationwide, only approximately 7% of homeowners have insurance that covers flood losses even though the risk of flooding is only increasing as coastal areas continue to be developed and climate change portends higher water levels and more devastating hurricanes and other storms. This Essay discusses the problem of flooding in America and the availability of insurance to cover the damage caused by floods. The Essay first addresses the theoretical justifications that private insurers in America historically have used to successfully support their refusal to cover flood losses -- adverse selection, moral hazard and correlated risks. The Essay then discusses the National Flood Insurance Program (NFIP), which the federal government created in an attempt to fill the void created by private insurers’ refusal to cover flood losses, and the problems with the NFIP. The Essay then moves to a discussion regarding how European countries such as the UK, France and Belgium insure flood losses. The Essay concludes by offering a simple solution to the problem of insuring flood losses in America: eliminate the flood exclusion from homeowners insurance policies. This underappreciated solution would address the problems with the NFIP and would increase the number of American homeowners who have insurance that covers flood losses from approximately 5.5 million to 69 million