Thursday, January 24, 2013

Why Is The Government In The Flood Insurance Business?

Hurricane Betsy hit the Gulf Coast in 1965.
There's a quick, one-word explanation for why the federal government started selling flood insurance: Betsy.

Hurricane Betsy, which struck the Gulf Coast in 1965, became known as billion-dollar Betsy. Homes were ruined. Water up to the roofs. People paddling around streets in boats. Massive damage.

This would be the time when you'd expect people to be pulling out their flood insurance policies. But flood insurance was hard to come by. You could get fire insurance, theft insurance, car insurance, life insurance. Not flood.

"There was a lack of data," says Eric Smith, president and CEO of Swiss Re in the Americas. "One of the bedrock principles of insurance is it has to be something that's somewhat measurable. You have be able to calculate its frequency, its severity. How often this going to occur and how much damage is it going to do?"

A few years after Betsy, in 1968, the government decided it would take on the job of selling flood insurance. Some people hated this idea. If private insurance companies wouldn't sell policies to people who wanted to live in flood zones, they argued, why should the government?

This argument did not win the day. The government created flood maps, gathered data, and set up the National Flood Insurance Program. "I think it generally worked out OK overall, until Katrina,"
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