Harvey could overwhelm federal flood insurance program

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Stranded vehicles sit where they got stuck in high water from Hurricane Harvey on Dairy Ashford Drive, August 28, 2017 in Houston, Texas.

With rain still falling in Texas, the initial estimates of the insured damage from Hurricane Harvey are already in the billions, a cost that could overwhelm the financially strained National Flood Insurance Program.

Insurers are bracing for a massive amount claims from Harvey after the storm's winds and surge pounded the Texas coast and dumped torrents of rain on the Houston area, flooding homes and prompting more than 1,000 rescues of stranded residents.

With the rain still falling late Monday, catastrophe modeling firm AIR Worldwide estimated that insured losses would range up to $2.3 billion.

Still, those figures cover only losses from damage to businesses and consumers that are covered by insurance. That's why total cost to repair damages from Harvey, which made landfall as a Category 4 hurricane Friday night, will likely be much higher.

"I think you'll see an awful lot of uninsured losses." -Jeff Dailey, Farmers Group CEO

Early estimates vary, but JPMorgan predicted eventual insured losses from Harvey could be as much as $10 billion to $20 billion, making it one of the 10 most costly hurricanes to hit the U.S.

Despite Harvey's heavy winds, much of the storm's damage resulted from flooding, which is covered almost entirely is through the National Flood Insurance Program. But according to the Insurance Council of Texas, only about 20 percent of homeowners have flood insurance.

Uninsured losses are expected to mount.

"For our own book of business, maybe one in four of our homeowners actually selects the [National] Flood Insurance Program. I think you'll see an awful lot of uninsured losses," said Jeff Dailey, the CEO of Farmers, a subsidiary of Switzerland-based Zurich Insurance which operates a multi-line U.S. business, including home and auto.

Damage claims from the homeowners who are covered could put the National Flood Insurance Program deeper in a financial hole. The program already owes the Treasury some $25 billion, most of which covered claims from Katrina in 2005, Superstorm Sandy in 2012 and severe floods in 2016, according to the Federal Emergency Management Agency, which manages the program.

In Harris County alone, the flood program holds more than 240,000 policies, representing more than $60 billion in coverage, according to AIR Worldwide.

That means Harvey may well push the flood program up against its borrowing limit of $30 billion and require further action from Congress to reform the program, which is due to be reauthorized at the end of September.

Last year, insurance companies paid out nearly $24 billion to cover insured losses due to natural disasters, up from about $16 billion in 2015, according to Munich Re, a reinsurance company

Floods and flash floods accounted for $4.3 billion of last year's insured losses in 2016, and hurricanes accounted for $3.5 billion of the total. Winter storms and freezes caused $1 billion in insured losses last year, while wildfires, heat waves and drought produced another $1 billion.

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