When the devastating 2015 floods ripped through South Carolina, they took the lives of 19 people and caused an estimated $12 billion in total losses – yet just $2 billion of that was insured. It’s not an uncommon story for flood-related disasters, and a new study from Zurich Insurance Group, Aon and ISET-International suggests that major coverage gap could have something to do with insurance professionals discuss risk.
The post event review capability (PERC) report found that even after one year, many residents in South Carolina are trying to rebuild and the “sad reality” is the state could experience such an extreme event again. Still, the thousand-year event did not move the needle on take-up rates for coverage.
Only 72% of those in South Carolina who should be purchasing flood insurance under FEMA guidelines are enrolled in NFIP, and the rates of voluntary coverage are even lower.
“There is a certain effect of the memory – you need to keep having floods in order for people to understand the need to keep themselves protected. Otherwise they forget quickly,” Michael Szyoeni, executive flood resilience specialist with Zurich, told Insurance Business America
. “After five to 10 years, more than half [of flooding victims] will have forgotten the event and are no better off in terms of willingness to purchase coverage than those who haven’t experienced it.”
Beyond high pricing, the reasons for the low take-up rates are fairly complex. One, the report said, is continued confusion over flood terminology that leads to inaccurate perception of risk. The “1,000-year event,” for example, is a “very misleading term,” according to Szyoeni. Many mistakenly assume the term means that events like South Carolina will happen just once every 1,000 years and the need to purchase coverage is therefore limited.
“The way we express the likelihood of something of this magnitude is really difficult for people, and we need to be better at overcoming that,” Szyoeni said, suggesting the industry instead use terms expressing probability like the “1% annual probability flood” or the “5% annual probability flood.”
Another reason take-up on flood is so low is a lack of understanding of just how damaging a flood can be.
“People tend to think it’s just a bit of water and you can clean it out and move on, but it’s really a life-changing moment,” Szyoeni said. “It’s really a huge force that can take out your home, affect your mortgage and possibly threaten your life. Many people in South Carolina lost everything.”
Insurance agents, then, need to do a better job of communicating that risk by going over just exactly what flood can do to a property. As for the cost concern, added time explaining fair pricing – and the fact that NFIP is heavily subsidized –may make some headway toward dispelling consumer assumption that coverage is overpriced and unnecessary.
“If you make that easy to grasp for people, they understand this is something they have to take action on, and one of those options for action is insurance protection,” said Szyoeni.
The full PERC report on the Carolina floods, including more suggestions for both the industry and consumers, can be found here