Heavy rains lashed California, causing billions of dollars in damage. But less than 2% of homeowners in the state have flood insurance.

By Aarthi Swaminathan

Increasingly Unexpected Weather Events Are Making California Homeowners Nervous

Heavy rains hit California over Christmas and New Years, causing billions of dollars in damage. But the bad weather also revealed just how vulnerable homeowners are becoming to the unpredictable effects of climate change.

Heavy rains and mudslides flooded homes and trapped cars in the state earlier this month. Parts of the 101 Freeway, south of Gilroy, California, were closed for several hours due to flooding.

However, few homeowners in the state were adequately prepared for the flooding. According to federal data, 192,404 California households have a flood-specific insurance policy in force, out of 14.5 million households. That’s less than 2%.

Before the rains, wildfires and droughts were the top pain points for California homeowners. Rains here and there also brought landslides and mud, but not flooding specifically.

The owners are now concerned about future damage. At St. Petersburg-based Neptune Flood Insurance, business from the state of California has increased 600% in recent weeks.

“These are largely being bought by people who were nearby — your neighbor or someone in the same town may have experienced flooding,” Trevor Burgess, the company’s chief executive, told MarketWatch.

“It’s a reminder of what can, is, and will happen more often because of climate change,” Burgess said.

Homeowners insurance rates depend on the risk of the home, Burgess said. For example, if his company quotes a homeowner $300 to $400 in premiums per year, “then you have a very low-risk property,” she explained, instead of being quoted $13,000 per year.

The average cost of flood insurance is $700, according to the Federal Emergency Management Agency, or FEMA.

Flooding and heavy snowfall will cost the state between $31 billion and $34 billion, according to an initial estimate by AccuWeather Inc. This includes the impact of power outages, mudslides, downed trees and road closures.

The company expects these costs to rise further as more storms hit the state.

“We’ve always had climate variability. We’ve always had these kinds of floods,” Tom Larsen, CoreLogic’s associate vice president of hazard and risk management, told MarketWatch.

“This is a weakness that puts us at risk,” he added, “and a house is the biggest investment a lot of people have.”

What does home insurance cover?

Most homeowners don’t realize that their current insurance policy doesn’t necessarily cover events like flooding, said Roger Grenier, senior vice president of the global resiliency practice at Verisk, a risk assessment and data analytics firm.

And people also “may assume that it’s okay, well, I understand my homeowners insurance doesn’t cover flooding, but if I have a flood, the government will give me some help to help,” Grenier said. “And that has proven to be a huge mistake.”

Unlike Florida, which frequently experiences wet, severe weather events, California has primarily seen droughts and wildfires.

Consequently, only a fraction of homes in California are specifically insured against flooding.

It’s an added expense: Californians already pay for homeowners insurance, which doesn’t cover flooding. Some also pay for fire insurance and even insurance against earthquakes, which occur more frequently in the state.

And for those who do get flood insurance, sometimes the coverage can be insufficient.

The National Flood Insurance Program, or NFIP, offers a policy to homeowners that covers up to $250,000 for one property.

The NFIP is administered by the federal government and offers homeowners, businesses, and similar owners the option to purchase federally backed insurance policies.

Covers direct physical loss to property from flooding, including tidal or inland water overflow and mudflow. It does not cover sinkholes or landslides.

Generally, $250,000 is enough to cover damage, but in California, where home prices can be exorbitant, the NFIP doesn’t do much, particularly for severe damage.

Mudflow is covered by flood insurance. In fact, one of the largest payments last year for a California home that was severely damaged by a mudslide was more than $600,000, Neptune’s Burgess said.

Flood insurance doesn’t just cover flooding, either. According to FEMA, anyone living downhill from an area that was recently affected by wildfires will be at risk of mudslides.

“The fires killed plants that soaked up the rain with roots that held the soil together. With nothing holding the soil together, it may not take much rain to turn the soil into a mudflow that could flow right into your house. , if you live downhill.” from an area burned by fire,” FEMA said in 2020.

And “since California has not experienced recent major flooding due to several years of drought conditions, it is natural that some people will develop a false sense of security about the need to purchase flood insurance,” said a spokesperson for the Federal Flood Administration. Insurance and Mitigation. , he told MarketWatch.

“It is too risky to continue to make those assumptions in light of climate change,” they added.

FEMA said it would continue to “robustly” push flood insurance across the country to improve rates.

Outdated flood maps used by homeowners

Part of the reason people don’t think they need flood insurance is due to a reliance on “grossly out-of-date” federal flood maps, according to the DC-based free-market think tank R Street Institute.

Homeowners and homebuyers in the United States generally rely on FEMA flood maps, which indicate the likelihood of flooding in their area.

But these maps won’t be enough in an era of climate change and unpredictable weather, experts said.

The maps “do not recognize the ways in which changing weather and development patterns (such as the capacities of local drainage systems or the amount of impervious ground cover) have changed flood risk,” the R Street report explained.

Additionally, the maps only reflect past flood experience and do not reflect how climate change and sea level rise increase the likelihood of flooding.

Strange weather can discourage homeowners. During Hurricane Harvey, 40% of the houses that flooded in Houston, Texas, were in areas considered low risk, according to a New York Times report.

Because of these maps, people fall into a specific train of thought, said Grenier of Verisk.

“So if I’m in this flood zone, then I’m at risk of flooding. And if I’m outside of these special flood risk areas and I’m not at risk of flooding, that’s really a huge misperception,” Grenier told MarketWatch. .

FEMA has been updating its maps by introducing a new pricing methodology called “Risk Scoring 2.0,” which is more streamlined.

The new model uses more variables to try to get a better idea of ​​who is at risk and to what extent. For example, the new risk scoring method looks at distance to a water source, elevation, and cost to rebuild.

“The best indicator of a property’s flood risk is the price of the insurance premium. Under the NFIP’s new rating methodology, prospective insureds need to be sure that the rate they receive reflects an accurate picture of their property’s risk and has the corresponding price”, said FIMA. said the spokesman.

Neptune, which uses proprietary data to determine flood risk, says that ultimately the price quoted by the insurance agent better reflects the homeowner’s vulnerability.

According to a report from the University of California, Davis, the new methodology increased premiums for 77% of NFIP customers nationwide.

In the San Francisco Bay Area, “many low-lying coastal areas will see premium increases, while hilly areas will see significant discounts,” the report said.

The increases are in the range of $5 to $7 a month in South San Francisco, Pacifica and Millbrae. Oakland Hills, San Ramon and other mountainous areas will see reductions of more than $20 a month.

For homeowners affected during these recent floods, the California Department of Insurance has two pieces of advice: First, if there is water damage, the CDI asks homeowners to check with their insurance company representative to see if they are covered. Second, he asked people to reach out if they had questions about what homeowners insurance covers, at insurance.ca.gov

Burgess, of Neptune Flood Insurance, said: “Out of a terrible tragedy, like the one that’s happening in California, comes a real opportunity to think about how we educate insurance agents and homeowners in California about the real risks they face.” .

-Aarthi Swaminathan


(END) Dow Jones Newswires

01-24-23 1102ET

Copyright (c) 2023 Dow Jones & Company, Inc.