Are you paying for someone else's flood insurance?

One US region is getting short shrift, routinely paying out more in flood premiums than it receive back in claims.

Insurance News

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The National Flood Insurance Program is more of a taker than a giver if you live in the Mountain West region of the US, a new study shows. According to research from the University of Pennsylvania Wharton Center for Risk Management and Decision Processes, Colorado leads the nation in giving more than it gets, paying more than 15 times what it collected in premiums in a 31-year period.

Policyholders in New Mexico, Wyoming, Idaho and Arizona also paid out far more than they received in claims payments. In fact, Alaska is the only state with one of the top five highest ratios that is not in the Mountain West.

On the other end of the spectrum, Texas flood insurance policyholders paid $4.5bn in premiums but collected a much larger $16.7bn in claims. Louisiana also made out well, with $4.4bn spent on coverage and $16.7bn received in claims—though Hurricane Katrina helped round out these numbers.

So why are policyholders in Colorado and other parts of the Mountain West stuck with such a seemingly raw deal?
Rocky Mountain Insurance Information Association Executive Director Carole Walker says it’s because many people in the region are required to buy flood insurance through their federal mortgages, but often never need to file a claim.

“I can only speculate, but it likely reflects the fact that there is a relatively low number of policies in force for flood insurance. The incidence of flood hasn’t been that high,” said Walker, whose association represents property casualty insurers in several Rocky Mountain states. “In the Mountain West, it’s typically dry and there hasn’t been a high number of claims. That’s why you might be seeing that low number of claims being paid in relation to premiums being purchased.”

Walker also mentioned that most Mountain West homeowners elect to purchase building coverage only, which typically pays out less in claims than other, more comprehensive forms of flood insurance.

The high ratios of premiums to payments in the Rocky Mountains may change in the following months, however—particularly in Colorado where severe flash flooding surprised the region and caused immense damage. No official estimates on claims figures have been released yet, but the flood is known to have destroyed nearly 2,000 homes.

Incidents like this mean flood insurance is always a worthwhile consideration, despite the imbalanced ratios, Walker said.

“How often do you have a 1000-year flood?” she asked.  “You just never know.”

The Wharton Center study examined flood insurance premiums and claims payouts from 1978 to 2008, with figures adjusted for inflation. The research was published in the Journal of Economic Perspectives.

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