You're not paying the premium based on the actual risk, but instead some fixed amount. So if a flood does destroy your house you collect the insurance money to

You're not paying the premium based on the actual risk, but instead some fixed amount. So if a flood does destroy your house you collect the insurance money to re-build at a cheaper cost than it should've been relative to the risk... kind of like insurance arbitrage. It's still an additional policy, but there's wiggle room to make the policy holder profit.