Flood claims deluge system

Federal insurance program is being revised after repeat claims involving same properties

September 24, 2005|By Knight Ridder/Tribune

MIAMI // Hurricane Rita is packing a powerful punch - a 15- to 20-foot storm surge - as it barrels toward the Texas and Louisiana coast.

Footing the bill for expected devastation in this region, as well as the wreckage caused by Hurricane Katrina in four states along the Gulf of Mexico, will fall largely to the National Flood Insurance Program. Created in 1968, the federally backed program today insures nearly 4.6 million properties nationwide, with about 2 percent of the homes right on the water's edge.

This year's storms could swamp the flood insurance program. In what could be a first for the insurance industry, flood damage claims from Katrina, and possibly Rita, could exceed claims from wind destruction.

Already, about 166,000 flood claims have come in from Katrina - nearly four times the number of claims the program handled after four hurricanes hit Florida last year.

But the national flood program isn't like the typical insurance company.

When the premiums it collects - about $2 billion a year - fall short of the claims it must pay, the flood program turns to the U.S. Treasury to make up the difference. It doesn't maintain reserves to cover outsized losses when major disasters hit.

Congress increased the flood program's borrowing authority to an unprecedented $3.5 billion - but that was before Rita loomed in the Gulf of Mexico.

Now, it likely won't be enough.

"It was raised to that level thinking the flood program might have to borrow at least that much" to pay claims from these storms, said Edward T. Pasterick, senior adviser in the Federal Emergency Management Agency, which administers the flood-insurance program.

Since its inception, the program has borrowed $4 billion. Yet, officials say the bulk of these borrowings have been paid back.

The program often operates in the red, falling into a $950 million hole in 1995 after it had to contend with floods in Louisiana and Texas as well as Hurricane Opal ramming the Florida panhandle.

This time around, "the money will flow. Congress isn't likely to change the program right now, But it could change it in the future," said J. Robert Hunter, director of insurance research for the Consumer Federation of America and a former federal insurance administrator.

Since Katrina caused ruin in South Florida, Louisiana, Mississippi and Alabama last month, there have been renewed calls to create a national program to spread the insurance risk and help survivors cope when major catastrophes strike.

Insurance commissioners, led by California's John Garamendi and Florida's Kevin M. McCarty, will meet in San Francisco next month to discuss how to develop a national catastrophe insurance program.

Right now, there's no model for such a program. The National Flood Insurance Program comes closest, and it's not perfect. It charges the same rates across the country - there's no upward pressure on rates even with this season's storms. It also insures many properties that have suffered substantial damage time after time.

Some 40,000 properties - out of 4.6 million covered by the insurance plan - have suffered repeated damage. Nearly 10,000 have filed two to four claims. But the impact of these repeated claims is huge: These properties account for more than 25 percent of the flood program's losses since 1978.

Plus, its flood plain maps, used to determine the risk of flooding, are woefully out of date in many areas. Some haven't been substantially updated since the program got under way more than 30 years ago.

The task of updating flood maps began in 2002. Congress included $200 million for this process over the next five years as part of a flood insurance program reform bill passed in 2004.

Like a health care insurer that covers only the elderly and the sick, the program takes on property in areas prone to flooding.

For homeowners to be eligible to buy flood insurance from the national program, local municipalities must take on the job of reducing flooding risk by improving building codes, storm drainage and requiring higher elevations for waterfront property. About 20,000 communities participate in this program, but about 1,000 don't.

The more aggressive a community's effort to lessen the impact of flooding, the greater the discounts it can earn for residents.

Despite the destruction floods cause - about $6 billion annually - "flooding is the most predictable of all the natural hazards we face," said Larry Larson, executive director of the Association of State Floodplain Managers.

With today's upgraded engineering tools, mapping techniques and technology, local officials can better account for the impact of storms given local development, land elevation and drainage.

Ideally, Larson said, the new flood maps should be drawn with future development taken into consideration. "We just can't engineer our way out of these problems," he said.

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