Fixing A Broken National Flood Insurance Program: Risks And Potential Reforms
by Dan Huber
The National Flood Insurance Program (NFIP) insures 5.6 million American homeowners and some $1 trillion in assets. For many years, however, the premiums collected have not been sufficient to cover losses, resulting in a current debt to the U.S. Treasury of more than $18 billion. A number of factors, including increased flooding as a result of climate change, are likely to further widen the gap between revenue and risk. Reforms are needed to put the NFIP on the path to solvency and to reduce homeowners’ exposure to chronic and catastrophic flooding risk. Ideally, such reforms should fully account for the increased risks posed by climate change. At a minimum, steps are needed to adjust premiums, improve flood mitigation measures, and prepare for the catastrophic risk of events like Hurricane Katrina.
With government budgets still reeling from the effects of the recent recession, and ongoing debates over the future costs of Medicare and Social Security, unfunded public liabilities are of growing concern. The National Flood Insurance Program (NFIP) is one such liability that is often overlooked. The NFIP is already significantly in debt due to premiums that have not reflected the true risk of flood damages. Looking forward, the risk of further losses only increases, as demographic trends place more infrastructure in harm’s way, watersheds are developed and climate change increases flood risk over time.
This paper explores the structural issues underlying the growing gap between flood insurance premiums and actual flood risk. It also examines reforms that can put the program on a more sound financial footing and the incentives needed to reduce the potential costs of future flooding. A report by the American Enterprise Institute found that insurers have “a huge opportunity today to develop creative loss-prevention solutions.”  Using both adaptive and financial tools to manage the rising risks posed by climate change will be critical to preventing losses and maintaining the insurability (and therefore property values) of trillions of dollars in at-risk property assets.
Between 1980 and 2005, U.S. insurers paid out a total of $320 billion in weather-related insurance claims. While not all weather-related claims are flood claims, losses from weather events are increasing. Today, the NFIP covers over $1.2 trillion in assets, representing more than a fourfold increase since 1980. If providing this coverage is to remain affordable, Congress must provide FEMA with the tools to accurately price and manage risk.
2. Kunreuther and Michel-Kerjan, (2009, January 15). Market and Government Failure in Insuring and Mitigating Natural Catastrophes: How Long-Term Contracts Can Help. Washington D.C., USA: American Enterprise Institute Conference on Private markets and Public Insurance Programs
Extreme Weather and Climate Change
Understanding the Link, Managing the Risk
Updated December 2011
Thousands of record-breaking weather events worldwide bolster long-term trends of increasing heat waves, heavy precipitation, droughts and wildfires. A combination of observed trends, theoretical understanding of the climate system, and numerical modeling demonstrates that global warming is increasing the risk of these types of events today. Debates about whether single events are “caused” by climate change are illogical, but individual events offer important lessons about society’s vulnerabilities to climate change. Reducing the future risk of extreme weather requires reducing greenhouse gas emissions and adapting to changes that are already unavoidable.
Typically, climate change is described in terms of average changes in temperature or precipitation, but most of the social and economic costs associated with climate change will result from shifts in the frequency and severity of extreme events. This fact is illustrated by a large number of costly weather disasters in 2010, which tied 2005 as the warmest year globally since 1880. Incidentally, both years were noted for exceptionally damaging weather events, such as Hurricane Katrina in 2005 and the deadly Russian heat wave in 2010. Other remarkable events of 2010 include Pakistan’s biggest flood, Canada’s warmest year, and Southwest Australia’s driest year. 2011 continued in similar form, with “biblical” flooding in Australia, the second hottest summer in U.S. history, devastating drought and wildfires in Texas, New Mexico and Arizona as well as historic flooding in North Dakota, the Lower Mississippi and in the Northeast.
Munich Re, the world’s largest reinsurance company, has compiled global disaster for 1980-2010. In its analysis, 2010 had the second-largest (after 2007) number of recorded natural disasters and the fifth-greatest economic losses. Although there were far more deaths from geological disasters—almost entirely from the Haiti earthquake—more than 90 percent of all disasters and 65 percent of associated economic damages were weather and climate related (i.e. high winds, flooding, heavy snowfall, heat waves, droughts, wildfires). In all, 874 weather and climate-related disasters resulted in 68,000 deaths and $99 billion in damages worldwide in 2010.
The fact that 2010 was one of the warmest years on record as well as one of the most disastrous, begs the question: Is global warming causing more extreme weather? The short and simple answer is yes, at least for heat waves and heavy precipitation. But much of the public discussion of this relationship obscures the link behind a misplaced focus on causation of individual weather events. The questions we ask of science are critical: When we ask whether climate change “caused” a particular event, we pose a fundamentally unanswerable question (see Box 1). This fallacy assures that we will often fail to draw connections between individual weather events and climate change, leading us to disregard the real risks of more extreme weather due to global warming.
Climate change is defined by changes in mean climate conditions—that is, the average of hundreds or thousands events over the span of decades. Over the past 30 years, for example, any single weather event could be omitted or added to the record without altering the long-term trend in weather extremes and the statistical relationship between that trend and the rise in global temperatures. Hence, it is illogical to debate the direct climatological link between a single event and the long-term rise in the global average surface temperature.
Nonetheless, individual weather events offer important lessons about social and economic vulnerabilities to climate change. Dismissing an individual event as happenstance because scientists did not link it individually to climate change fosters a dangerously passive attitude toward rising climate risk. The uncertainty about future weather conditions and the illogic of attributing single events to global warming need not stand in the way of action to manage the rising risks associated with extreme weather. Indeed, such uncertainty is why risk managers exist – insurance companies, for example – and risk management is the correct framework for examining the link between global climate change and extreme weather.
An effective risk management framework accommodates uncertainty, takes advantage of learning opportunities to update understanding of risk, and probes today’s rare extreme events for useful information about how we should respond to rising risk. Risk management eschews futile attempts to forecast individual chaotic events and focuses on establishing long-term risk certainty; that is, an understanding of what types of risks are increasing and what can be done to minimize future damages. An understanding of the meaning of risk and how it relates to changes in the climate system is crucial to assessing vulnerability and planning for a future characterized by rising risk.
For more on the relationship between extreme weather and climate change, visit our Extreme Weather web page, where you'll find our extreme weather events map, along with other reports and C2ES resources.
 Karl, T. R., Meehl, G. A., Miller, C. D., Hassol, S. J., Waple, A. M., & Murray, W. L. (2008). Weather and Cliamte Extremes in a Changing Climate; Regions of Focus: North America, Hawaii, Caribbean, and U.S. Pacific Islands. A Report by the U.S. Climate Change Science Program and the Subcommittee on Global Change Research. Washington, D.C., USA: Department of Commerce, NOAA's National Climatic Data Center.
 BBC News. (2011, January 1). Australia's Queensland faces 'biblical' flood. Retrieved May 19, 2011, from http://bbc.in/fNzGgK; Associated Press. (2011, May 1). Federal fire crews bring expertist to huge TX fire. Retrieved May 19, 2011, from http://bit.ly/iz6JRs; Associated Press. (2011, June 16). Concern over human-caused blazes grows as wind-driven wildfires promp more evacuations. Retrieved June 22, 2011, from Washington Post: http://wapo.st/iWxirz; Sulzberger, A.G. (2011, June 26). In Minot, N.D., Flood Waters Stop Rising. Retrieved November 22, 2011, from New York Times: http://nyti.ms/ufT9jY; Doyle, R. (2011, September 8) U.S. sweltered through hottest summer in 75 years. Retrieved November 22, 2011, from USA Today: http://usat.ly/o73h4o; Robertson, C. (2011, May 15). Record Water for a Mississippi River City. Retrieved November 22, 2011, from New York Times: http://nyti.ms/lp0cTA; Freedman, A. (2011, September 12). Historic Flooding Recedes in Pennsylvania, New York; at least 15 dead. Retrieved November 22, 2011, From Washington Post: http://wapo.st/qvywOo
 Karl et al., Weather and Cliamte Extremes in a Changing Climate, Op. cit.