Reforming National Flood Insurance Program

With the Senate set to vote today on fixes to the ailing National Flood Insurance Program (NFIP), a new C2ES brief explains why the program is chronically in debt to the U.S. Treasury, and how to make it solvent. We urge, among other things, that Congress allow federal underwriters to begin taking into account rising flood risk due to climate change.

The 44-year-old federally-backed NFIP covers 5.6 million American households and more than $1 trillion in assets in flood-prone areas along rivers and coasts. Flooding is not an easy risk to insure, so historically private insurers chose not to. But in assuming that role, the NFIP has at times served to encourage rather than contain risk, and has racked up $18 billion in debt in the process.

Among the problems: subsidies and loopholes allow low premiums that don’t cover the actual risk, and the flood maps the NFIP relies on are often woefully outdated. Going forward, the gap between revenue and risk is likely to grow as development continues in flood-prone areas—and as those zones become larger and riskier due to sea-level rise and more extreme precipitation, two consequences of climate change. Recent research indicates that the East Coast of the United States, with its large NFIP policy pool and asset valuations, is a risk hotspot, with rates of sea level rise well above the global average.

Over the years, as NFIP’s structural problems have become more and more evident, Congress has approved a series of short-term reauthorizations without really tackling the underlying issues. With the program again due for reauthorization, there finally appears to be some prospect of serious reform.

Last year, the House passed H.R. 1309, which would allow premiums to rise up to 20 percent a year, limit subsidized premiums to primary residences, and establish a technical advisory council to help update flood maps. The bill stops short, however, of requiring that updated maps take into account the full projected effects of climate change.

Today, the Senate is scheduled to take up its own version, S.1940. While the bill would limit premium increases to 15 percent a year, it also would require that NFIP flood maps reflect the “the potential for future inundation from sea level rise, increased precipitation, and increased intensity of hurricanes due to global warming.”

Differences between the two bills will have to be ironed out later in conference committee. And while each is a step in the right direction, neither goes as far as needed to put the program on the path to solvency. 

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 encouraging flood preparedness and by ending effective subsidies for building in flood-prone areas. In order to both maintain affordable coverage and solvency, the NFIP must be authorized to undertake a combination of full-risk pricing, cost effective mitigation measures such as stronger building codes for new construction and reinsurance purchases for catastrophic risk. While the risks are rising, with smart planning we can reduce costs, prepare for a changing climate and protect vulnerable communities.

Dan Huber is a Science & Policy Fellow at C2ES.