By Liam Sigaud, American Consumer Institute
For years, the National Flood Insurance Program (NFIP), which maintains a near-monopoly over the flood insurance market in the U.S. and covers more than 5 million properties nationwide, has been drowning in red ink. Without significant reforms, it will only get worse.
The NFIP, which is overseen by the Federal Emergency Management Agency (FEMA), was created a half-century ago when Congress realized that ad hoc disaster relief was an inefficient way to help coastal communities mitigate and recover from floods.
Since the NFIP’s creation, flood risk in the U.S. has rapidly worsened. NOAA estimates that disruptive and expensive flooding is at least 3 times more common in U.S. coastal communities than it was 50 years ago. A recent report by the SmarterSafer Coalition points out that nearly 40 percent of the U.S. population is located on or near a coast, meaning that rising sea levels will cause ever-increasing damage. Even under optimistic assumptions, by 2100 experts predict sea levels to be at least one foot above the 2000 benchmark. Flooding is not just becoming more frequent, it’s also becoming more costly. In 2017, for the first time ever, the average NFIP claim surpassed $100,000.
The NFIP’s latest financial disclosure shows more than $20 billion in outstanding debts to the U.S. Treasury, partly a remnant of the massive payouts related to Hurricanes Katrina, Rita, and Harvey, as well as Superstorm Sandy. But not all of the NFIP’s fiscal challenges can be blamed on bad luck. The nonpartisan Congressional Budget Office (CBO) estimates that the NFIP faces an average long-term annual shortfall of $1.4 billion, while the Government Accountability Office continues to categorize the NFIP as “high risk,” a designation reserved for programs vulnerable “to fraud, waste, abuse, and mismanagement, or that need transformation.”
The biggest structural problem the NFIP faces is that its premiums are not actuarially sound; they are based on an outdated formula that does not adequately reflect a property’s risk and is not adjusted in response to flood events. In many cases, owners only pay 55 to 60 percent of the full risk premium. Discounted rates are often justified as a way to help low-income households, but most of these subsidies actually go to wealthy homeowners. By underpricing policies, the NFIP encourages construction in flood-prone areas — an outcome diametrically opposed to its mission of mitigating flood damage.
As a result, a major drain on the NFIP’s finances comes from repetitive loss properties: buildings that are flooded over and over. While these properties only made up one percent of all policies, they accounted for 38 percent of all claims paid by the NFIP from 1978 to 2004. In the affluent coastal town of Scituate, Massachusetts, for example, just 150 properties have received more than 40 percent of the town’s $60 million in NFIP claims paid since 1978. A $70,000 home in Mississippi filed 34 insurance claims and received $663,000 in payouts from 1978 to 2010. By ensuring that premiums reflect actual risk and encouraging more robust mitigation measures, the NFIP can reduce the financial burden of these properties.
The inaccuracy of floodplain mapping — on which NFIP risk modeling is based — must be addressed as well. Some communities rely on maps created in the 1970s, and a 2017 Inspector General report found that only 42 percent of the FEMA’s maps “adequately identified the level of flood risk.” Using sophisticated technology such as Light Detection and Ranging (LIDAR) surveys, high-resolution maps can help identify property-level differences in risk and improve FEMA’s understanding of how flood risks will evolve in the future.
In the face of Congressional inaction and stopgap funding measures, these problems will only grow more acute. As climate change causes flood risks to escalate around the country and once-safe areas become vulnerable to disasters, Congress needs to take bold steps to stabilize the NFIP’s finances and enact policies that promote climate adaptation and mitigation.
Liam Sigaud writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.