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Water, water everywhere: in the past two decades, the underwriting of flood insurance has become more complicated.

It has been called the Rodney Dangerfield of catastrophes. While most of the attention for catastrophe losses goes to windstorms, earthquakes and now, terrorism, it is the peril of flood that consistently causes the most havoc and costs the insurance industry the most money.

Never has the United States been more at risk from flooding. As construction booms across the American landscape, nowhere is it more lucrative than along the coastlines. Riverfronts, lakefronts and other waterways are also attractive to buyers and thus appealing to developers. By their nature, these homes and businesses are almost automatically faced with the threat of flood.

The danger and costs of flood are intensified by the higher value of properties affected. And the increased attention to mold, which can often follow a flood, is causing remediation costs to skyrocket. Frankly, there is no such thing as a simple flood.

The new construction across the country also is causing unprecedented runoff patterns. As a result, many addresses that were never considered threatened by floods are now squarely in harm's way.

On the plus side, the United States is far ahead of most of the civilized world in identifying flood-prone areas. The Federal Emergency Management Agency's designation of Flood Zones has historically been a good barometer for predicting flooding.

However, this is an inexact science, and Flood Zones often have been mistaken by agents and underwriters as being the only real underwriting guide on the issue. A common school of thought is that a location in a Flood Zone A should be avoided while something in a Zone C should present no problems.

And while this is serviceable as a rule of thumb, the numerous floods that have occurred in Zone C areas confirm that there is more to flood underwriting than knowing the zone. For example, the massive flooding that occurred in downtown Houston with Hurricane Allison in 2001 caused damage in mostly Zone C areas, much to the dismay of unsuspecting underwriters who freely or inexpensively included high limits for flood coverage.

In the past 20 years, the underwriting of flood insurance has become more complex. There have been changes, often subtle, indicating that the threat of flooding is growing. The four major issues to contemplate with regard to this increased exposure to flooding are:

* Landscape changes. Anytime impervious cover is added to the earth, the water that will eventually fall to that spot has to run somewhere. This applies to the development of properties in harm's way as well as those hitherto safe locations now facing run-off problems. Rain water has to flow somewhere and increasingly, it is flowing into unsuspecting homes and businesses.

* Climate changes. We've all heard and read about the effects of global warming on the environment. A discourse on the impact of climate change could fill a library and the topic could be debated endlessly. However, there is evidence that global temperatures have risen in the past 100 years and they are expected to continue to rise. There also is evidence that a rise in global temperatures leads to an increase in rainfall and an increase of large, dramatic rains. You don't need to be a meteorologist to conclude that all of this boosts the threat of floods and that the results may be even more severe than in the past.

* Outdated or inaccurate mapping systems. All things considered, FEMA has done an amazing job of designating flood zones in this country. But while FEMA's guides are a good start, their maps can be outdated and the resultant information can thus be misleading. Several insurers, reinsurers and independent risk modeling companies are developing proprietary information, but it is a daunting task both from an expense and quality standpoint.

* Floods happen. There have been floods since the time of Noah, and we will continue to see them. We will never escape the problems that come with too much rain in too short a time in too tight an area.

Underwriters should be cognizant of deductible options, coverage limitations and the potential for sublimiting values. The opportunity to use the National Flood Insurance Program should be taken whenever possible. Risk engineers and insureds should stay abreast of elevation issues, basement and first floor storage of items, and plans for evacuation or moving of contents.

Given that flooding is an ongoing issue, we need to learn as much about the peril as possible and to stay on top of underwriting and coverage trends. Memorizing FEMA Flood Zone definitions is always a good start, but there is much more to be learned.

Michael P. Egan, a Best's Review columnist, is a property officer with Swiss Reinsurance Co., Philadelphia. He can be reached at
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Title Annotation:Underwriting Insight
Comment:Water, water everywhere: in the past two decades, the underwriting of flood insurance has become more complicated.(Underwriting Insight)
Author:Egan, Michael P.
Publication:Best's Review
Geographic Code:1USA
Date:May 1, 2005
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