The flood insurance industry is now changing more than ever. These changes are really to lock down on ensuring that your flood risks are well covered so that you won't get lopsided by a flood event.
Some of the changes we've seen in recent years are how the National Flood Insurance Program (NFIP) updated to Risk Rating 2.0 and another would be the availability of private flood insurance for FHA loans.
In this blog, we will talk about parametric insurance for flood policies and how it could impact the flood industry as a whole.
What is Parametric Flood Insurance
Parametric insurance in general is a form of coverage wherein the policyholder will be rated on the overall impact or severity upon an occurrence of the event. This is drastically different from simply basing it on the impacts or losses to the insured.
In the case of a natural disaster like earthquakes, wildfires, or floods, this means that the coverage that will be provided will be based on the actual impact of that disaster on your property.
For flood insurance, this could mean that you will be covered based on the general impact of the flooding instead of simply how much flood damage your property occurred. Generally, parametric flood insurance also kicks in as the flood event is hitting you instead of having the insurance coverage kicking in after assessing the damage to the insured building.
This real-time analysis is done by using technologies from satellites and other data that detect things like the level of water impacting the installed device on the property. This allows the insurance companies to also provide the necessary claims as soon as possible since the assessment is being done during the flood event and not simply after.
To set an example, FloodFlash — led by Mark Hara — one of the leading parametric flood insurance that's recently adding the United States to the areas where they are looking to provide coverage, mentioned that they use a specific tool that immediately notifies them whenever a policyholder gets flooded.
So, you might be wondering, how is this different from the standard flood insurance policy that you can get through the NFIP or private flood insurance?
Difference Between Parametric and Standard Flood Insurance
When it comes to what sets parametric flood insurance from standard flood insurance policies, we will look into its coverage, claims payout, and overall timeframe for your policy to kick in. So, let's discuss each of these.
A standard flood insurance policy can provide you coverage for a maximum of $250,000 for building coverage and a maximum of $100,000 for content or personal property coverage for flood losses. This is especially true if you have a policy with the NFIP and even with its recent Risk Rating 2.0 update.
On the other hand, private flood insurance is where you can find more flexibility as their standard flood policy coverage doesn't really have limits. You can generally go way above that $250,000 and $100,000 coverage with federal flood insurance.
So, how is parametric flood insurance different?
Well, since your flood insurance claim will be paid out through cash or generally directly to your bank, you can get more than what a standard flood policy offers. This means that even additional living expenses or business loss of use will be part of that coverage.
These coverages are something that traditional insurance doesn't generally include especially for federal flood insurance. Hence, parametric flood insurance can really fill in for that coverage gap that standard flood coverage generally misses. This is no surprise as it is, after all, one of the goals of parametric insurance.
It's important to note, however, that parametric insurance policies are based on a pre-agreed sum of money when it comes to coverage. This means that if you agreed to get only $250,000 for coverage with your parametric flood insurance policy, that is the only amount you will be getting.
Claims Payout & Turnaround Time
Now, when it comes to claims payout, parametric flood insurance also has its fair share of beneficial factors because of how the system works.
You see, once your insurer detects that the water levels hit that certain spot — generally about 8 inches of water — the insurers' system immediately gets notified about this as if it's saying "Hey! This property is legit getting flooded right now".
Generally, this means faster turnaround time and assessment. Since parametric flood insurance basically has the amount of coverage ready to fight against flood damage and the data confirms the flooding, flood claims may be paid out as soon as 24-48 hours.
Again, since most companies who provide parametric flood insurance tend to provide coverage through cash, this means that you get the payout immediately or the coverage is generally transferred to your bank.
RELATED: 3 Things that Must Happen for Flood Claim to Pay Out
On the other hand, a standard flood policy will generally pay out in less than 90 days. This is because there's a process such as assessing the damage, filing the flood insurance claim, and waiting for the claims payout.
Although this timeframe generally depends on your insurance provider, it can still take days (if not weeks) for a flood policy to pay out with traditional flood insurance.
Why Parametric Flood Insurance is Good
Now that we've covered what parametric flood insurance can do, it's easy to see why this could really help homeowners and business owners in the United States.
Since it fills in the potential gaps in standard flood insurance and has a relatively quick turnaround time for payouts, this can really improve our resilience to the risk of flooding.
Considering how the impacts of climate change and the behavior of water are drastically changing for the worse especially in recent years, having this type of insurance protection will really help more people find security and certainty.
Moreover, adding this option in the flood insurance sector may also increase property owners' motivation to get flood insurance for their property.
Got more questions on flood insurance or parametric flood policies? Is there a flood question that you need answered? Click below to go to our Flood Learning Center where we try to answer all your flood-related questions.
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