On the last day of October, Hurricane Sandy was making its way inland over the New England region, heading towards Canada and leaving a trail of destruction –even after being downgraded to a tropical storm. Hundreds of thousands of homeowners in the Northeast, many of them still without power, were assessing damages to their properties on the morning of Wednesday, October 31st. Meanwhile, insurance company executives were making their own assessments with regard to the total losses arising from claims.
The catastrophic path of Hurricane Sandy once again puts the federal National Flood Insurance Program (NFIP) into focus. The average home insurance policy does not offer coverage in case of flooding, which happens to be one of the most destructive losses a residential property can sustain. Insurers are extremely risk-averse in this regard, and the NFIP bridges that gap by providing separate coverage that protects mortgage lenders whose borrowers live in known flood plains.
There are more than five million NFIP policies in effect in the United States, but many of them are not in the regions affected by Hurricane Sandy. Major insurer Allstate estimates that about a quarter of all flood damage claims, which average about $30,000 in losses, occur in places that are not normally considered to be at risk of flooding. In the case of states like New Jersey and New York, homeowners will be able to submit claims for wind damage and fallen trees that hit their properties, but flood damage claims are separate.
Risk analysis and modeling firms are estimating that losses caused by Sandy will range from $7 billion to more than $20 billion, thus making it the most most economically destructive natural disaster since hurricanes Andrew and Katrina. Insurers were feeling the financial impact even before Sandy made landfall as investors began selling off shares of major insurance companies a week ago.
The NFIP will probably increase the regions it offers policies in after seeing the aftermath of Sandy. These flood policies are only made available when a mortgage is involved, and they are of little benefit to homeowners. Borrowers who closed mortgages just two weeks before Hurricane Sandy made landfall, their home will not be protected by the flood policy since it takes 30 days to go into effect. In cases when insurance policies are absent, government assistance is available in the form of loans issued to those living in federal disaster areas.