Why Is It So Hard to Fix the National Flood Insurance Program?

A tangle of politics and problems may force yet another delay in long-sought updates to the broke, beleaguered U.S. National Flood Insurance Program (NFIP). Congress has the unenviable task of putting NFIP back in the black without raising rates too quickly on folks who can’t afford to leave vulnerable coastal homes. And the weather isn’t helping.

The NFIP was due for reauthorization in September, after several years of challenge in the wake of the enormously costly Hurricane/Superstorm Sandy in 2012. Then came Hurricanes Harvey, Irma, and Maria this year—which complicated matters further by adding another $10-plus billion to the program’s $25-billion debt.

Congress passed a temporary extension of the NFIP that runs out in early December. There’s now a good chance that another extension will be needed, perhaps into 2018. The 21st Century Flood Reform Act, a House bill that appeared this week to be nearing a vote, instead found itself bottled up in committee. Several other draft bills in the House and Senate this year have failed to gain traction. Update: The U.S. House passed the 21st Century Flood Reform Act on November 14.

Hard-hit by population, development, and a changing climate

The NFIP was launched in 1968, at a time when private insurers were abandoning the flood market. The program was intended as a way for the federal government to pick up the slack while reducing long-term flood risk. Communities that join the NFIP are required to maintain minimum floodplain standards in order for their residents to access NFIP insurance. The program has mushroomed from a few thousand policies in the 1960s to about 5 million today, providing more than $1.2 trillion in coverage. Maximum coverage for a single-family home is $100,000 in contents and $250,000 for the structure itself.

Figure 1. Number of NFIP policies in force as of March 2016. Image credit: “Review of FEMA Study and Report on Community-Based Options,” U.S. Government Accounting Office, August 2016.

In an ideal world, NFIP premiums would be calibrated to the actual flood risk at every location. In fact, the payouts are more than covered by premiums in most years. However, “NFIP’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses,” noted the U.S. Government Accountability Office in a 2017 report. Moreover, NFIP’s founders may not have fully anticipated the headlong rush to develop in flood-prone areas, especially near the Gulf and Atlantic coasts, and the resulting explosion in the value of coastline property.

As noted in a YaleEnvironment360 report, the value of land and structures along the New Jersey coast rocketed from less than $1 billion in 1960 to more than $170 billion by 2017. Catastrophe modeler Air Worldwide estimates that the insured value of property in all counties along the U.S. Gulf and Atlantic coast jumped from $7.2 trillion in 2004 to $10.6 trillion in 2012—and that's taking into account the big hit to home values in the late 2000s caused by the Great Recession.

Increased development can itself boost flood risk, as rainfall flows readily off pavement and into swollen waterways instead of being absorbed by the landscape. Then there’s the impact of intensified heavy-rain events and rising sea levels, both of which are research-confirmed products of a climate being warmed by human-produced greenhouse gases. The 8 inches of Sandy-related storm surge attributed to rising sea levels since 1900 in the New York area may have been responsible for as much as 24% of Sandy’s property damage in New York City ($2 billion of $8 billion), according to a study from Climate Central and the University of North Carolina.

Most of the biggest hits to NFIP have come from hurricanes and mid-latitude winter storms. These can produce both surge-related inundation on the coast and rainfall-related flooding well inland. Still other events, such as the Midwest’s Great Flood of 1993, have racked up hundreds of millions in NFIP payouts many hundreds of miles from the coast.

As noted by Yale360, two-thirds of the $52 billion paid out by NFIP from 1978 through 2016 (unadjusted for inflation) was used to compensate victims of just six events, all in the 21st century:

Hurricane Katrina, August 2005:  $16.3 billion
Superstorm Sandy, October 2012:  $8.6 billion
Hurricane Ike, September 2008:  $2.7 billion
“No-name” Louisiana floods, August 2016:   $2.4 billion
Hurricane Ivan, September 2004:  $1.6 billion
Hurricane Irene, August 2011:  $1.3 billion

Figure 2. Leslie Andermann Gallagher surveys the flood damage to her home on August 17, 2016 in Sorrento, Louisiana. Massive flooding from a slow-moving storm across southeast Louisiana was the nation’s most expensive weather-related disaster in 2016. Image credit: Joe Raedle/Getty Images.

Flooding that’s out of the blue—or par for the course

In recent years, the U.S. has seen several multi-billion-dollar flood events hitting thousands of people who live outside NFIP’s Special Flood Hazard Areas—regions designated as having a 1% or greater flood risk each year. Flood insurance is required in order to get a home loan in these “100-year-flood” areas. The timing of updates to these maps varies from place to place; some maps have not been updated since the 1980s, which can leave the current risk underappreciated.

Insurance Journal reported an estimate from catastrophe modeler RMS that Louisiana’s “no-name” floods—the costliest U.S. weather disaster of 2016—hit tens of thousands of homes in parishes where as few as 1% of property owners carried flood insurance. Only about 15% of homes in the Houston area had NFIP policies when Hurricane Harvey struck, according to Steve Bowen, director of meteorology for insurance broker Aon Benfield.

At the other end of the risk spectrum, where flooding is routine rather than unexpected, we have “severe repetitive-loss-properties,” the highest category of multiple flood losses.  According to a 2017 NRDC report, these properties flood every two to three years on average; they represent nearly 10% of all NFIP payouts (1978-2015) but only 0.6% of insured properties. More than half of these homes are valued at less than $250,000. FEMA grants are available for buying out such properties, but it’s up to state and local governments to pursue such grants or to pay for buyouts themselves—and often this doesn’t happen.

Multiple NFIP claims over the years can add up to many times the actual value of a property. Some examples cited by the Washington Post in July:

“One house outside Baton Rouge, valued at $55,921, has flooded 40 times over the years, amassing $428,379 in claims. A $90,000 property near the Mississippi River north of St. Louis has flooded 34 times, racking up claims of more than $608,000. And an oft-flooded Houston home has received more than $1 million in payouts — nearly 15 times its assessed value of $72,400.” 

Figure 3. . The darker colors show counties particularly prone to repetitive losses. Image credit: “Overwhelming Risk: Rethinking Flood Insurance in a World of Rising Seas” (Union of Concerned Scientists), based on FEMA data.

What are the possible fixes?

“We’ve been underwriting and underpricing disaster risk in this nation for too long,” said former FEMA director Craig Fugate in an October interview. The 21st Century Flood Reform Act includes several concepts now gaining broad interest as bulwarks against the tide that threatens to swallow NFIP. These include:

A gradual ramp-up in rates for higher-risk areas. The NFIP was last renewed through the Biggert-Waters Flood Insurance Reform Act of 2012, passed in late 2011 when NFIP was more than $17 billion in debt. Crafted with bipartisan sponsorship, Biggert-Waters mandated that NFIP’s premiums should be in line with the actual risk and potential losses at each location. As a result, many premiums that had been held artificially low for years suddenly jumped by as much as a factor of 10.

The rate hikes were quickly reined in by the Homeowner Flood Insurance Affordability Act of 2013, which limited the annual increase in premiums for single-family homes to a maximum of 15% (or 25% for those with severe repetitive loss). The new House bill would allow a continuation of this more gradual type of increase, though the exact numbers may end up being tweaked. The House bill also adds a minimum $5000 deductible for damage incurred at severe or extreme repetitive-loss properties.

Mandatory disclosure of flood risk. Amazingly, a number of states have no requirement that a homeowner inform a potential buyer that a home has suffered flood losses. Some states and cities do have such requirements, including Houston, Miami-Dade County, California, and Delaware. However, “a patchwork of inconsistent state and local policies is insufficient,” said Laura Lightbody, who coordinates the Flood-Prepared Communities program for the Pew Charitable Trusts. “A single, national standard requiring sellers to disclose a property’s flood history makes sense.”

The House bill would mandate that NFIP communities require a flood-hazard disclosure for all home sales after September 2022, including any knowledge of:

•  prior flood damage
•  prior flood insurance claims
•  any designation of repetitive- or severe-repetitive-loss property
•  any obligation to carry flood insurance based on having received previous disaster assistance

A greater role for private insurers. Free-market-oriented legislators would like to see more emphasis on the private sector in addressing NFIP’s woes. The House bill would establish a federal clearinghouse by 2021 that would steer customers toward private insurance options in high-risk areas. For properties where no private coverage is available, NFIP would serve as the insurer of last resort. One risk with such an arrangement is that it could make it possible for private insurers to skim off the lower-risk policies, leaving NFIP with the tab for higher-risk properties.

New assistance for low-income policyholders. The House bill would establish a Flood Insurance Affordability Program, allowing and encouraging states to help residents that are in financial need obtain NFIP insurance. It’s not clear how states would pay for such programs, though.

“I think that this bill does try to put [NFIP] on a financially solvent path,” Lightbody told me. “It takes repetitive loss very seriously, and it better communicates risk through transparency.”

Figure 4. Denny Lazarus helps salvage what he can from his parents’ flooded home on August 18, 2016 in St. Amant, Louisiana. Image credit: Joe Raedle/Getty Images.

Commentary: Where to from here?

It’s going to take a Herculean effort to get the NFIP ship righted. Passing legislation of any type in this year’s Congress has been tough, and NFIP is no simple matter. In the Senate, NFIP reauthorization would require 60 votes, which is a high bar for almost any bill in today’s polarized political climate.

Rather than a dispute among classic party lines, the main turf battle with NFIP seems to be between those who want to maintain development in the most flood-prone places—or simply hang on to their homes there—and an eclectic mix of environmentalists, fiscal conservatives, researchers, and insurers who’d like to see the financial risks more equitably apportioned.

It’s worth noting that the current House bill makes no mention of climate change. Sea level rise will only increase the amount of coastal flooding over time. It’s also quite possible that intensified extreme rainfall will trigger increased flooding across inland areas that don’t expect it. As it stands now, both types of flooding will ultimately hit the taxpayer, either through FEMA payouts to areas struck by surprise flooding or through the continued subsidizing of insurance for structures at ever-increasing coastal flood risk.

Buying out multiple-risk coastal properties, and prohibiting construction in the most flood-vulnerable places (keeping climate change and sea level rise in mind), are two sensible options. NRDC has estimated that buying out more than a million less-expensive homes vulnerable to eventual sea level rise could save taxpayers as much as $59 billion over the cost of repeated NFIP flood claims.

As sensible as buyouts and development limits may seem, they also go against the grain of an ancient, primal desire: to live next door to the beauty and power of water. We’ll explore the ever-increasing tension between coastal living and rising seas in a future post.

Below is a video commentary on NFIP from weather.com's Kait Parker.

Nation’s Flood Insurance Program is Broken from Weather Films on Vimeo.