Not Covered: Why Our National Flood Insurance Program is (Also) Underwater

Robert W. Klein September 14, 2017

September 12, 2017—A flooded neighborhood in Bonita Springs, two days after Hurricane Irma hit Florida.

Editor’s Note: The fol­low­ing analy­sis was first pub­lished short­ly after Hur­ri­cane Har­vey dev­as­tat­ed a large por­tion of South Texas (killing more than 70 peo­ple and cost­ing yet-to-be-tal­lied bil­lions of dol­lars in flood dam­ages) but three days before Hur­ri­cane Irma made land­fall at Cud­joe Key, in the low­er Flori­da Keys, on the night of Sep­tem­ber 10. Before hit­ting the U.S. main­land, Irma tore a path of destruc­tion through numer­ous islands in the Caribbean.

In Flori­da, search-and-res­cue oper­a­tions are still under­way, entire neigh­bor­hoods have been destroyed and mil­lions of peo­ple statewide are with­out pow­er. Mean­while, res­i­dents who heed­ed evac­u­a­tion warn­ings are anx­ious­ly await­ing the chance to return to their homes and busi­ness­es — in some cas­es, only to find out what lit­tle the storm left of the struc­tures and pos­ses­sions they left behind. 

In both states, even with hypo­thet­i­cal­ly unlim­it­ed finan­cial assis­tance, rebuild­ing the infra­struc­ture that’s been lost will take years. Unfor­tu­nate­ly, a major­i­ty of these loss­es are unin­sured. Worse still, the fed­er­al pro­gram estab­lished in 1968 to help peo­ple recov­er from cat­a­stroph­ic flood dam­age is already $25 bil­lion in debt. 

What is flood insurance?

Home­own­ers’ insur­ance does not cov­er dam­age to a home caused by flood­ing. A home­own­er must have a sep­a­rate pol­i­cy to cov­er flood-relat­ed loss­es, defined as water trav­el­ing along or under the ground.

Most such poli­cies are under­writ­ten by the Nation­al Flood Insur­ance Pro­gram, which is part of the Fed­er­al Emer­gency Man­age­ment Agency (FEMA). The Nation­al Flood Insur­ance Pro­gram was estab­lished in 1968 to address the lack of avail­abil­i­ty of flood insur­ance in the pri­vate mar­ket and reduce the demand for fed­er­al dis­as­ter assis­tance for unin­sured flood loss­es. Anoth­er pur­pose was to inte­grate flood insur­ance with flood­plain man­age­ment, which includes such things as adopt­ing and enforc­ing stricter build­ing codes, retain­ing or restor­ing wet­lands to absorb flood­wa­ters and requir­ing or encour­ag­ing home­own­ers to make their homes more flood-resistant.

The Nation­al Flood Insur­ance Program’s activ­i­ties are fund­ed large­ly by the pre­mi­ums and fees paid by its pol­i­cy­hold­ers, sup­ple­ment­ed by a small amount of gen­er­al funds to help pay for flood risk map­ping. Because the Nation­al Flood Insur­ance Pro­gram serves the pub­lic inter­est, some believe that more of its fund­ing should be borne by taxpayers.

Home­own­ers can pur­chase a fed­er­al flood pol­i­cy direct­ly from the Nation­al Flood Insur­ance Pro­gram or through a pri­vate insur­er. Sep­a­rate­ly, some pri­vate insur­ers sell their own flood poli­cies on a lim­it­ed basis for prop­er­ties that are over­charged by the Nation­al Flood Insur­ance Program.

How many Amer­i­can home­own­ers have flood insurance?

It is dif­fi­cult to deter­mine exact­ly how many home­own­ers have flood insurance.

The Nation­al Flood Insur­ance Pro­gram had just under five mil­lion poli­cies in force as of June 30. Of these poli­cies, approx­i­mate­ly 68 per­cent were on sin­gle-fam­i­ly homes and 21 per­cent on con­do units. There is no source on how many pri­vate flood poli­cies are in force, but my sense is that it is very small rel­a­tive to the num­ber of Nation­al Flood Insur­ance Pro­gram policies.

In recent years, the num­ber of such poli­cies has been drop­ping across the coun­try. Some of the coun­ties hard­est hit by Har­vey, for exam­ple, such as Har­ris (which includes Hous­ton), have expe­ri­enced sig­nif­i­cant declines.

A more reveal­ing — and more dif­fi­cult to ascer­tain—stat is the share of home­own­ers in a dis­as­ter area who actu­al­ly have flood insur­ance. In Har­ris Coun­ty, for exam­ple, experts esti­mate that only about 15 per­cent of home­own­ers are insured for floods — though the per­cent­age should be high­er in areas near coastlines.

Real estate data com­pa­ny Core­L­og­ic esti­mates that approx­i­mate­ly 70 per­cent of flood loss­es from Har­vey will be uninsured.

Why do peo­ple at great risk of flood­ing for­go insurance?

A num­ber of fac­tors affect a homeowner’s deci­sion to buy flood insur­ance (or not).

Peo­ple who per­ceive that their expo­sure to floods is high are more like­ly to buy it, all oth­er things equal. And the manda­to­ry pur­chase require­ment forces own­ers of mort­gaged homes locat­ed in Spe­cial Flood Haz­ard Areas — areas at high risk for flood­ing — to buy insurance.

How­ev­er, 43 per­cent of home­own­ers incor­rect­ly believe that their home­own­ers’ insur­ance cov­ers them for flood losses.

Oth­er fac­tors also come into play, such as a lack of infor­ma­tion, the dif­fi­cul­ty of cal­cu­lat­ing flood risk and the expec­ta­tion that the gov­ern­ment will pro­vide dis­as­ter assis­tance — which is rarely the case.

What does flood insur­ance cover?

With a Nation­al Flood Insur­ance Pro­gram pol­i­cy, a home­own­er can pur­chase cov­er­age on a dwelling up to $250,000 and the con­tents of a home up to $100,000. It does not cov­er costs asso­ci­at­ed with loss of use” of a home.

The Nation­al Flood Insur­ance Pro­gram pol­i­cy lim­its have been in effect since 1994 and need to be updat­ed to account for the increase in the replace­ment cost of homes and the actu­al cash val­ue of their con­tents. Although not the best mea­sure of the replace­ment cost, the medi­an price of new homes sold in the U.S. has soared 132 per­cent since 1994.

Some home­own­ers buy addi­tion­al flood pro­tec­tion from pri­vate insur­ers to make up any shortfall.

Why is the Nation­al Flood Insur­ance Pro­gram underwater?

The Nation­al Flood Insur­ance Pro­gram has faced con­sid­er­able crit­i­cism over its under­writ­ing and pric­ing poli­cies, which have result­ed in a sub­stan­tial debt. Essen­tial­ly, its pre­mi­ums are not high enough to cov­er how much it pays out on claims and its oth­er costs.

Part of the prob­lem is that about 20 per­cent of the prop­er­ties the pro­gram insures pay a sub­si­dized rate. But many oth­er Nation­al Flood Insur­ance Pro­gram pol­i­cy­hold­ers are also pay­ing pre­mi­ums sub­stan­tial­ly less than what it costs to insure them because the rates do not ade­quate­ly account for the cat­a­stroph­ic loss­es incurred dur­ing years when more major storms than nor­mal strike, such as Kat­ri­na and Rita in 2005 and Sandy in 2012. As a result, the Nation­al Flood Insur­ance Pro­gram owes an accu­mu­lat­ed debt of $25 bil­lion to the U.S. Treasury.

Hur­ri­cane Har­vey (and poten­tial­ly oth­er storms such as Irma that may fol­low) will sub­stan­tial­ly increase this debt. Core­L­og­ic esti­mates that Nation­al Flood Insur­ance Pro­gram-insured flood loss­es from Har­vey alone will be $6 bil­lion to $9 billion.

In the short term, Con­gress will have to increase the Nation­al Flood Insur­ance Program’s bor­row­ing author­i­ty for it to pay the claims that will result from Har­vey and oth­er storms this year. Law­mak­ers could make a gen­er­al fund appro­pri­a­tion to for­give all or a por­tion of the Nation­al Flood Insur­ance Program’s debt, but it has shown no inter­est in doing so.

These inad­e­quate rates also exac­er­bate the moral haz­ard cre­at­ed by flood insur­ance. Peo­ple are more like­ly to buy, build or rebuild homes in flood-prone areas and have dimin­ished incen­tives to invest in flood risk mit­i­ga­tion, such as by ele­vat­ing their home, if they can buy insur­ance at below-cost rates.

What can be done to fix the program?

Leg­isla­tive efforts to reform the Nation­al Flood Insur­ance Pro­gram to put it on firmer fis­cal foot­ing have pro­duced mixed results.

The Big­gert-Waters Act of 2012 made a num­ber of changes to the pro­gram, such as increas­ing pre­mi­ums and oth­er changes to make it more finan­cial­ly sta­ble,” that would have gone a long way to restore its fis­cal sol­ven­cy. How­ev­er, an out­cry from home­own­ers in high-risk areas such as coastal Flori­da led to the Home­own­ers Flood Insur­ance Afford­abil­i­ty Act, passed in 2014, that lim­it­ed or rescind­ed many of the Big­gert-Waters rate increases.

Fun­da­men­tal­ly, the pro­gram that mil­lions of Amer­i­cans rely on to help them rebuild their lives after a dev­as­tat­ing flood needs to be fixed. Its dire finan­cial straits could be resolved by either mak­ing tax­pay­ers foot more of the bill or increas­ing pre­mi­ums clos­er to full-cost rates for most home­own­ers, while also rais­ing total cov­er­age levels.

At the same time, the gov­ern­ment needs to do more to con­vince or com­pel more at-risk home­own­ers to buy flood insur­ance — which would be hard­er to do if it were to raise rates. To me, this sug­gests that increas­ing tax­pay­er sup­port for the NFIP will have to be part of the solu­tion so that pricey pre­mi­ums don’t become a deter­rent to some­one buy­ing insurance.

With the like­li­hood of much more flood­ing in the com­ing weeks and years, more needs to be done to mit­i­gate the risk, includ­ing pro­duc­ing more accu­rate and time­ly maps of the flood risk in var­i­ous areas, espe­cial­ly high-risk areas, edu­cat­ing peo­ple about what those risks real­ly mean and help­ing relo­cate home­own­ers as necessary.

(“How Flood Insur­ance Works: 6 Ques­tions Answered” was first pub­lished by The Con­ver­sa­tion and is repost­ed on Rur­al Amer­i­ca In These Times thanks to a Cre­ative Com­mons license. Robert W. Klein does not work for, con­sult, own shares in or receive fund­ing from any com­pa­ny or orga­ni­za­tion that would ben­e­fit from this arti­cle, and has dis­closed no rel­e­vant affil­i­a­tions beyond the aca­d­e­m­ic appoint­ment above.)

Robert W. Klein is an Asso­ciate Pro­fes­sor and Direc­tor of the Cen­ter for Risk Man­age­ment Insur­ance Research at Geor­gia State Uni­ver­si­ty. Before that, Klein served as the direc­tor of research for the Nation­al Asso­ci­a­tion of Insur­ance Com­mis­sion­ers. He also served as a staff econ­o­mist for the Michi­gan Insur­ance Bureau and the Michi­gan Sen­ate Fis­cal Agency.
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