Flood Insurance Reform

It’s not surprising that homeowners in flood-prone areas are asking their representatives in Congress to protect them from higher flood insurance bills.

Here’s the question. Who is going to protect them from higher floods?

Congress in 2012 did the right thing in fixing a broken flood insurance system that has fallen $24 billion in debt, largely because the price of flood insurance hasn’t for many years matched the risk of a flood. Now, both the House and Senate have passed bills that would undo many of these reforms.

Congress should find a way to address both the immediate and long-term concerns of their constituents, and the rest of the nation. We can’t ignore the plight of families facing hefty insurance increases, and we must ensure that the process of making flood insurance reflect flood risk is fair and transparent. But we also can’t ignore the increasing costs and risks associated with growing coastal development in an era of rising seas and heavier precipitation.

Among the problems with the National Flood Insurance Program (NFIP) that we outlined in a C2ES brief:

  • Subsidies and loopholes have allowed low premiums that don’t cover actual risk.
  • The program has relied on flood maps that in some cases haven’t been updated in more than 30 years.
  • The gap between revenue and risk is likely to grow as development continues in flood-prone areas — and as climate change leads to sea-level rise and more extreme precipitation.

In 2012, Congress voted to reform the program and require the Federal Emergency Management Agency (FEMA) to adjust premium rates to more accurately reflect flood risk. According to FEMA, about 20 percent of NFIP policies pay subsidized rates. It raised premiums, up to 25 percent a year, for a small percentage of policies for non-primary residences, businesses, and properties with severe, repeated flood losses. Subsidies also were no longer available for newly purchased properties. 

What happened next is that some coastal homeowners were suddenly confronted with steep premium increases, and were concerned they’d be unable to sell their properties as a result.

This January, the Senate voted to delay the reforms, and any rate increases, four years. A bill the House passed this week would limit rate increases to no more than 18 percent a year. It also says FEMA “must strive to” limit the cost of a flood insurance policy to 1 percent of a home's total coverage, for example, $1,000 a year for a $100,000 policy. The bill also would repeal the requirement that new policies and policies from recently sold properties reflect full risk rates. This means that for older buildings, subsidized policies can now be passed on from one homeowner to the next and new subsidized NFIP policies can be purchased.

In addition, the bill would reinstate grandfathering, where structures subject to increasing flood risk and mapped into a higher flood risk zone would continue to pay the previous, lower premium rate. To pay for reinstating these subsidies, and maintain a neutral Congressional Budget Office score, the House bill would assess a yearly fee of $25 to primary residences with an NFIP policy and $250 to businesses and second homes.

Lowering the limit of annual rate increases to 18 percent makes sense to help gradually get subsidized premiums to rates that accurately reflect flood risk. But arbitrarily capping premiums, reinstating grandfathering, and removing mechanisms to bring properties to full risk rates would undermine the long-term effort to get the deeply indebted flood Insurance program on the right track.

By paying for these reinstated subsidies with a flat fee on all homes regardless of flood risk, Congress is further distorting the flood insurance market. This clause blunts market incentives for homeowners to increase flood resilience and overcharges those who have taken action to reduce flood risk. It also masks the true risks homeowners face. As rising sea levels, increased heavy precipitation and other changes continue to push homes and businesses into higher risk zones, the costs of subsidized flood insurance will continue to rise, setting the table for another crisis.

Our brief, The National Flood Insurance Program: Risks and Potential Reforms, lays out a fuller set of reforms to reduce both flooding risk and financial risk by not only ending what are effectively subsidies for building in flood-prone areas, but also by encouraging flood preparedness.

Hurricane Sandy's estimated $65 billion in damages — much of it from flood damages — make it the second costliest hurricane in U.S. history, surpassed only by Hurricane Katrina. Building resilience to the impacts of major coastal storms like Sandy — and to other types of extreme weather — will require a commitment to better protect infrastructure and implement policies to encourage people to get out of harm’s way.

In areas where climate change enhances flood risk, we can avoid significant costs and damages if we act now, rather than kicking the can down the road.

Photo Credit: Flood Insurance Reform/shutterstock