Posted On: March 14, 2006, 1:49 pm CST

Posted By: Chris

Yo, Dean!

If the carriers went back to the old New York Fire Policy, no one would be able to get a mortgage.

Insurers already know how to provide blanket coverage for flood. Wording the policy isn't the problem. Getting enough people to buy the coverage at a premium that covers the exposure is the problem.

If every homeowner's policy in a particular state had blanket flood coverage on a mandatory basis, the premium would still be so high that almost no one could afford to pay it. So, everyone but a few people buys, the rest let their entire HO property coverage lapse. What happens then?

Well, lots of mortgage companies buy forced placed coverage that has the coverage, and then add the premium to the mortgage. This would result in defaults out the wazoo because the premium on forced placed coverage is usually higher than standard market coverage, and people who couldn't afford it at the "cheaper" private rate sure can't afford it at the higher rate. This would lead to foreclosures (yep, you guessed it; out the wazoo!).

Meanwhile, in order to make up for the premium shortfall to make the flood premium being paid by the rich homeowners sufficient to cover expected losses, the carriers raise their rates. In the end, the only people who can own homes are those that can pay cash, so that they don't need property coverage. Everyone else rents...

But wait, the owners of the rental houses now have to buy the coverage. So, they have to increase the rent to cover the premiums. So now no one can afford to rent, either.

There is a reason why the government provides the flood coverage, and why the "premium" is not really exposure based, but subsidized by tax dollars.

The "Homeowner" policy does cover the risks most associated with a home that can be insured for a premium that is actuarially sound AND affordable. But, some causes of loss aren't insurable that way, simply because the cause of loss guarantees that the resulting covered losses would be so catastrophic and widespread that no affordable premium could be charged.