National Flood Insurance Program Can’t Keep Afloat Without Reform
And Congress has until November 30th to do something about it.
Hurricane season may be over, but it’s left a trail of damage that may take years (or even decades) to clean up. The southeastern and mid-Atlantic coasts were hit by two particularly devastating hurricanes, causing the loss of at least 87 lives and costing up to 80 billion in damages. Our country’s poorest and most vulnerable communities are hit the hardest, forcing them to not only salvage their physical property, but also scavenge for whatever financial resources they have to rebuild their lives. For some residents, this financial burden is partially alleviated by the federal government’s National Flood Insurance Program (NFIP). Insurance programs, such as the NFIP, can promote climate adaptation directly and indirectly through claim payments and by encouraging resilient planning (see chapter 17.5.1). The NFIP in its current state, however, does not have the capacity to cover losses from back to back disasters. Here, we’ll explore how the NFIP falls short and ways it may be improved.
The NFIP was created 50 years ago because private insurers were unwilling to provide risky and costly flood coverage. The money from insurance can give people a much-needed boost to recover from catastrophic events, however the outdated NFIP does not receive enough in premiums to cover losses from back to back disasters. Maria, Harvey, and Irma caused approximately $265 billion in damages, and the damages from Florence and Michael will add nearly 80 billion. As of August 2018, the government provided about 1.23 trillion dollars in coverage for about 5 million properties, yet only received about 3.57 billion dollars in premiums.
If the NFIP were a private company, it’d go bankrupt. However, it is able to remain standing through heavy government subsidies. While these substantial subsidies keep prices affordable (the cost of an NFIP policy is about half of what it’d be at market rate), the cheap prices may also disincentivize people from either fortifying their homes against hurricanes, or relocating completely. Just one percent of the properties covered by NFIP, those that repeatedly experience severe flooding, account for nearly a quarter of insurance claims. A study by the NRDC estimates that three quarters of homes that have received more payments than their house is worth have not taken any measures to mitigate their risks.
Although Congress forgave 16 billion of the NFIP’s debt, it’s still in the hole by about 20.5 billion, a debt that will grow unless substantial reform measures are taken. Congress has the opportunity to reform the program come November 30th when they will decide whether to extend the program. According to Diane Horn of the CRS, unless the NFIP is reauthorized or amended by Congress, the authority to provide new insurance coverage will expire, and the authority to borrow funds from the Treasury will be reduced from $30.425 billion to $1 billion.
Changes in climate are predicted to intensify hurricanes, causing more rainfall, higher storm surges, and ultimately more harm to our coastal communities. A more robust NFIP won’t stop these hurricanes from occurring, but it’ll at least give homeowners the means to recover once one hits.
Summarized below are a handful of reform recommendations from experts in the field:
Improve accuracy of flood maps. To anticipate future risks, flood maps should be updated using geospatial data and based on structure specific flood elevation and frequency determinations.
- Recommended reading: Mapping the Zone Improving Flood Map Accuracy
Transition to risk-based pricing. Insurance premiums should reflect actual risks so that homeowners better understand the hazards they face and are incentivized to adapt more resilient behaviors.
- Recommended reading: Incentivising flood risk adaptation through risk-based insurance premiums: trade-offs between affordability and risk reduction
Address affordability. Moving to risk-based premiums may make insurance unaffordable to low-income households. Options such as vouchers, subsidized mitigation (rather than subsidizing insurance premiums), and other forms of assistance should be considered.
- Recommended reading: Addressing Affordability in the National Flood Insurance Program
Educate the community of risks. Increased engagement, such as through educational programs, can help homeowners and policy owners better understand their risks, adaptation options, and can influence voluntary flood insurance purchase behavior.
- Recommended reading: Understanding the effects of past flood events and perceived and estimated flood risks on individuals’ voluntary flood insurance purchase behavior
Public/Private Partnerships. Increased coverage through private partnerships can help reduce the financial risk to NFIP by increasing overall amount of flood coverage purchased while also including more flexible flood polices.
- Recommended reading: Private Flood Insurance and the National Flood Insurance Program