Flood Insurance: Underwater

The indebted National Flood Insurance Program expires next month. Can private insurance and mitigation plug the holes?

Will congress renew the NFIP?

Five Figures to Consider

7/31 is the date the National Flood Insurance Program is set to expire
58% of current flood zone maps are outdated
50 states have experienced floods or flash floods in the past five years
$20.5 billion in debt owed by the National Flood Insurance Program
2 million homes expected to be submerged by 2100 (2% of U.S. housing stock)

Roared ashore. Barreled across. Lashed down. However they arrived, the record-breaking  hurricane waters of 2017 engulfed residents in Texas, Florida, Puerto Rico and the U.S. Virgin Islands triggering $8 billion in National Flood Insurance Program (NFIP) payouts by the end of that year. Those payouts soaked the federal program, which was already more than $20 billion in debt. With the NFIP set to expire on July 31, 2018what can be done to make the nation’s debt-ridden flood insurance program more resilient before the next storm strikes?


The NFIP was created in 1968 after many private companies abandoned the flood insurance market and left the government more exposed to disaster claims. To participate, communities must mitigate flood risk through regulated land-use practices. In turn, the federal government offers community residents flood insurance at low rates. The damage from a flood is not covered under a standard homeowner’s policy. The program, despite Congress recently forgiving $16 billion of its debt, is $20.5 billion in the red. Why? Premiums don’t cover costs (a typical yearly shortfall is $1.4 billion), and when superstorms strike, the shortfalls escalate forcing the NFIP to borrow from the Treasury to pay damage claims. Complicating the matter are four facts:  58% of current flood zone maps are outdated so many premiums charged don’t represent actual risks, 20% of NFIP policies receive discounted rates, an NFIP policy currently costs about half of a market rate policy and not enough people retain flood insurance. An AP News survey found 50% of the 10 million properties that need flood insurance actually have it.


The need for flood insurance is greater than ever because epic storms are increasing in frequency. The number of tidal floods has increased five-to-tenfold since the 1960s, exposing more property to both routine flooding and storm surges. All 50 states have experienced floods or flash floods in the past five years. According to Risky Business, a report prepared by a group co-chaired by former New York City Mayor Michael Bloomberg, $66 billion-$160 billion worth of U.S. real estate could be below sea level by 2050, while a Zillow study found that nearly two million U.S.homes worth almost $900 billion could be underwater by 2100. By the end of the century, average annual losses from hurricanes and other coastal storms along the Eastern Seaboard and the Gulf of Mexico will increase by more than $42 billion due to sea level rise alone. Potential changes in hurricane activity could raise this to $108 billion.  


What’s the fix? The government (and taxpayers) can’t be underwater (figuratively) every time the weather wreaks havoc. Nor should premiums be so high that consumers desert the insurance market. Yet, they shouldn’t be so low that they don’t reflect the full risk of loss or blunt incentives for risk mitigation. A few reforms have recently moved the situation in the right direction. The 2012 Biggert-Waters Flood Insurance Reform Act aimed to make the NFIP more solvent by among other things phasing out most rate discounts and establishing a national flood mapping program. Rates for flood insurance should accurately reflect risk, which is indeterminable without an up-to-date map. The Homeowner Flood Insurance Affordability Act of 2014 (P.L. 113-89) slowed the phase-in but also allowed NFIP to secure reinsurance from private reinsurance and capital markets. In January 2017, FEMA purchased $1.042 billion of reinsurance for an annual premium of $150 million. The reinsurance covered 26% of losses between $4 billion and $8 billion arising from a single flooding event. Additionally, FEMA announced this spring that it would seek to transfer NFIP risk to private markets through an insurance-linked security transaction or “catastrophe bond” that would further offset losses to the program.


To further reduce exposure, the Senate might follow the lead of the House of Representatives and pass legislation similar to the 21st Century Flood Reform Act (H.R. 2874), which would reauthorize the NFIP until 2022 and introduce various reforms. One important reform would make it less burdensome for private insurers to offer flood policies. If more insurers enter the marketplace, there will be competition on rates and coverage limits, which should entice more homeowners to buy policies and help keep rates down. Private competition would also offset NFIP risk thereby making it more solvent. Flood mapping could also continue without the interruption a lapse in NFIP authorization would bring. Additionally, SmarterSafer.Org, a diverse, non-partisan coalition concerned with fiscally sound natural catastrophe policy, urges mitigation efforts. Why spend so much more on post-disaster cleanup and rebuilding than on pre-disaster mitigation? Currently, if homeowners take steps to mitigate flood risk by home elevation or adding flood vents, they may receive an insurance discount but there is no guarantee. Decision makers want the certainty that homeowners can offset the cost of implementing mitigation. Developing mitigation incentives whereby states, localities and individuals who take initiative to manage flood hazards and floodplain resources before a storm hits would be rewarded with tax credits, and favored insurance and lending rates could induce stakeholders to make changes to reduce their risk. Mitigation efforts might include elevating or building properties higher than required, building or fortifying with flood-resistant materials like insulated concrete form and installing flood vents and hurricane shutters. Additional public mitigation strategies include acquiring or demolishing flood-prone buildings, strengthening natural features that help buffer storms or enforcing building and zoning codes to make properties and zoning decisions more sustainable. A National Institute of Building Sciences (NIBS) report showed that every $1 spent on hazard mitigation efforts leads to $6 in reduced future disaster costs. Furthermore, investing in hazard mitigation measures to exceed select code requirements such as building higher than code or with fortified materials, can save the U.S. $4 in disaster recovery for every $1 spent.  


Major storms bring devastating flooding to all parts of the U.S. and represent a growing threat for the foreseeable future. Drawing private insurers to the market, redrawing flood maps and investing in pre-disaster mitigation strategies will ensure neither homeowners nor the Treasury are hung out to dry.


Climate Science Special Report, congress.gov, Department of Homeland Security, Federal Emergency Management Agency (FEMA), floodsmart.gov, National Association of Insurance Commissioners, National Institute of Building Sciences, Property Casualty Insurers Association of America, riskybusiness.org, SaferSmarter.Org, The Heritage Foundation, U.S. Government Accountability Office, Zillow