Private insurance companies could play an important role in providing flood insurance and offering lower rates in some instances than those charged by the National Flood Insurance Program (NFIP), according to a new study by the Wharton School of the University of Pennsylvania.
The findings contradict conventional wisdom that private insurance rates would always be higher than what the NFIP charges.
Using state-of-the-art probability modeling, the Wharton Risk Center analyzed the likelihood of future catastrophic flooding and the potential cost of providing private flood insurance. The pilot study calculated the "actuarially fair" flood insurance premium for more than 300,000 homes in Texas' flood-prone Galveston and Travis counties.
Based on those estimates, the report shows there are certain areas where average NFIP premiums are too high and other areas where average premiums are too low.
"This presents opportunities for private insurers to provide coverage in some of those areas to complement the NFIP," Erwann Michel-Kerjan, Risk Center managing director and study co-author, said in a press statement. "There are several practical barriers that would need to be addressed for private insurers to sell such coverage, but if done, this could significantly increase the number of residents with proper coverage, thus reducing the need for government disaster relief."
The study also performed cost-benefit analyses for various flood mitigation measures and found that elevating residences can significantly reduce the likelihood and consequences of flood damage in some areas. The strategy is most cost effective for new construction.
Established in 1968, the NFIP covers more than 5 million households across the country and has been renewed more than a dozen times over the past three years. The program is in debt, and Congress has been debating how to reform it.
Homeowners in flood-prone areas who have federally backed mortgages must have flood insurance. Standard home insurance does not cover flood damage.