In the wake of the "great flood of 1993," Congress is beginning to reassess the National Flood Insurance Program. Begun with the National Flood Insurance Act 1968, the program was designed to mitigate the personal losses of citizens and the need for federal disaster relief.

The program has never performed according to plan. Many lenders do not require flood insurance as a condition for credit approval for properties in flood-plains, and as many lenders allow the coverage to be canceled during the term of the loan.

It's ironic that customers and lenders do not require or maintain flood insurance coverage. The majority of customers maintain some type of property insurance and the majority of lenders immediately take action to "force" insurance coverage for minimum property insurance.

The irony becomes clear by observing the laws of probability. There is a 26% chance of a devastating flood during a 30-year period of homes in a 100-year floodplain, compared with a 1% chance of a devastating fire during the same period. Yet less than two million of the approximately 11 million properties in floodplains are covered by flood insurance.

Realizing that the insurance program is not working, Rep. Doug Bereuter, R-Neb., introduced legislation to allow banks to require flood insurance, similar to property-insurance requirements.

In addition, he has proposed that fines of up to $100,000 per year be assessed on institutions that maintain a pattern and practice of failing to require flood insurance.

Flood insurance is not a banking issue and never will be, except as a risk to considered in the credit approval process. As a result, the National Flood Insurance Program will never work so long as it is focused on using banks as law enforcement officers versus the insurance industry as a means to finance the flood risks.

Much of the failure of the flood insurance program is due to its design. It ensures conflict between customers and bankers.

On the one hand, the bank is required to foist flood insurance on the customers as a condition of credit.

A Better Deal

On the other hand, customers without the need to finance their properties have the choice to maintain insurance, knowing that some form of federal disaster relief will be provided if a major flood occurs. In other words, millions of taxpayers not living in floodplains will be required to help foot the bill.

A simpler and more effective solution would be to require all insurance carriers to incorporate flood coverage in all policies for properties in floodplains. This would eliminate the need for any banking laws for food insurance.

Further, the Federal Deposit Insurance Corp. would have one less risk, as it would minimize loan losses resulting from flood damage as well as eliminate the threat of lawsuits against lenders for falling prey to customer demands to drop the flood insurance requirement and later being sued by the customers when floods wipe out their properties.

Using the flood insurance program, incentives for floodplain control could be developed by the market in cooperation with federal law. Specifically, the present law requires that local communities participate in the National Flood Insurance Program in order to have access to flood insurance. Such participation requires the local community to establish minimum flood-control building codes.

Failure to establish and/or to enforce these codes can lead to suspension of the community and loss of flood insurance availability and disaster relief grants.

The Bottom Line

If flood insurance were required as part of all property insurance coverage for properties in flood plains, the insurance rates could be set by the insurance companies similar to other coverages.

In other words, insurance would be available and required in all floodplain areas. Its costs would be determined by the local communities' compliance with the flood insurance program's flood-control requirements.

The bottom line is that the costs of disaster relief could be brought under control for flood damages.

Using the present cost of flood insurance of $300 per year and the nine million properties not carrying flood insurance, there would be $27 billion per year to pay for annual flood damages.

More important, it would push the burden back to the industry that finances risk, where it belongs, and off the backs of bankers.

By T. HERBERT STEVENSON Executive vice president Young & Associates, Kent, Ohio

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