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August 12, 2008

MIDWEST FLOODING DISASTER LESSON:
THE MEANING OF FLOOD ZONES

The amazing thing about the destructive flooding in Iowa in June was not the extent of if,
but the fact that most of the flooding occurred in areas not considered special flood hazard
areas. 

All areas of the country are zoned by FEMA to indicate the severity of the flooding
exposure.  Zones A and V are what are called the “special flood hazard” areas.  These are
areas where lenders mandate that the coverage be carried.  These are “100- year flood”
areas,” meaning the chance of flooding in any given year is one out of 100 (1%).  Zone B is
the area of the 500- year flood.  Zone C is the area outside of the 500-year flood – the lowest exposure.

No exposure to worry about outside of Zones A and V?  Not true at all, though that is
the common wisdom.  In Iowa in June most of the flooding occurred in Zone C.  The
recurring theme in discussions of the event is that the loss was not predictable. 
Risk managers would never use such a phrase, as we are always concerned about the
unexpected.

Said Craig Lang, president of the Iowa Farm Bureau, “This was not expected.”  Donna
Pearcy of the University of Iowa, expressing the same thought said  “ We exceeded the 500
year flood level, and that is important in understanding the magnitude of this.”  Mark
Bernacki of Beazley Group, a Lloyd’s of London syndicate that writes flood insurance
expressed it this way:

“I think businesses in the Midwest have thought much more about flood coverage since 1993 [the last flood disaster in the area] and those who are in the 100-year areas are probably prepared, but those in the 500-year area probably didn’t expect this.”

The risk management reality is that flood coverage should be carried in most situations
regardless of zone.  FEMA pays over 25% of their flood claims in areas outside of the
“special flood hazard” areas.  As with most exposures, the probability (or remoteness) of
the event is less important than the severity of the event if in fact it does come to pass.  The
importance of the flood zones is geared to pricing of the insurance more than it is the
factor in deciding whether to carry the coverage.  The reasonableness of the insurance
premium in Zone C (and to some extent even in Zone B) should ease the burden of paying
the premium.

As with due diligence in all areas of endeavor, a professional approach to risk management
serves us much better than the wisdom of crowds.

 For more information, contact Debora Wu, at DWU@LicataRisk.com

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