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
As Rio+20 negotiators rush to complete a consolidated text of outcomes before heads of state begin arriving tomorrow, participants at hundreds of side events are calling on business and government to take stronger action on clean energy, poverty elimination, food security, oceans, sustainable cities, green technology development, education, and more.
On Sunday at the U.S. Center pavilion, C2ES and the Global Environment Facility (GEF) convened a panel of companies, small-business innovators, and business representatives highlighting the critical roles played by each in promoting low-carbon innovation and sustainable development.
One of the centerpieces of this month’s Rio+20 summit is an important initiative called Sustainable Energy for All (SE4All). C2ES is pleased to be contributing to this initiative as a founding member of a new global partnership aimed at improving energy efficiency and curbing greenhouse gas emissions through the use of information and communication technologies.
Led by UN Secretary General Ban Ki-moon, SE4All recognizes the dual energy challenges facing the global community. We need to rapidly expand access to affordable energy for the 1.3 billion people who now lack even basic services, but do so in an environmentally sustainable manner that doesn’t put their health at risk or threaten the climate stability of our planet.
Opportunities for low-carbon innovation are growing, driven by policy changes, market shifts, and continued growth in energy demand, particularly in developing countries. This Sunday in Rio de Janeiro, ahead of the UN’s “Rio+20” Conference on Sustainable Development, C2ES will have a chance to share what it’s learned about low-carbon innovation with partners from around the world.
With the Global Environment Facility (GEF), we will convene a panel of companies (Johnson Controls, DuPont), small-business innovators (from the Cleantech Open), and government and business representatives (from UNIDO and ABDI) to share stories and lessons from the front lines of clean-tech entrepreneurship. The event, to be held at the U.S. Center pavilion, will examine the keys to successful low-carbon innovation, and the benefits for climate mitigation and adaptation, energy security, resource efficiency, and job creation.
Last week, the Union of Concerned Scientists released a new report, A Climate of Corporate Control: How Corporations Have Influenced the U.S. Dialogue on Climate Science and Policy. It’s an important topic, as we know there are professional merchants of doubt whose sole purpose is to exaggerate scientific uncertainty on environmental issues where in fact the science is quite clear. As the report points out, we have seen this time and again with topics such as tobacco, leaded gasoline, SO2, asbestos, DDT, and now climate change.
Here’s how the authors describe their aim: “…Ultimately, we seek a dialogue around climate science and policy that prioritizes peer-reviewed scientific information over the agendas of specialized interest groups.” That’s a goal we at C2ES certainly share. And toward that end, we’d encourage a somewhat more nuanced and realistic perspective on how companies behave and why. Let me explain.
Opportunities for clean-tech innovations are growing, driven by policy changes, market shifts, and continued growth in energy and resource consumption, particularly in developing regions of the world. The next 20 years will be critical for the development, demonstration and deployment of clean technologies that can support climate mitigation and adaptation, energy security, resource efficiency, job creation, and competitiveness. This panel will feature recent projects and lessons learned in promoting low-carbon and clean-tech innovation and entrepreneurship in both established multinational companies and start-ups. Business leaders will discuss the drivers and strategies for developing solutions that reduce GHG emissions at the same time as they bring bottom-line value, improved efficiency, enhanced performance, or competitive edge in a global marketplace. Innovation experts from business and government will describe the steps that can be taken to recognize and support innovation and entrepreneurs in their countries, including the needs for mentorship and incubation for aspiring innovators and small-medium enterprises.
This RIO+20 side event was held on Sunday, June 17, 2012, from 5:00-6:30 pm at the U.S. Center pavilion. Links to PDFs of the presentations are provided below.
- David Rodgers, Senior Energy Specialist, Global Environment Facility
- Meg Crawford, Markets Business Strategy Fellow, Center for Climate and Energy Solutions (C2ES)
- Clay Nesler, Vice President, Global Energy Sustainability, Johnson Controls, Inc.
- Dawn Rittenhouse, Director, Sustainable Development, DuPont
- Rex Northen, Executive Director, Clean Tech Open
- Pradeep Monga, Director, Climate and Energy, United Nations Industrial Development Organization (UNIDO)
- Roberto Alvarez, Agency for Industrial Development in Brazil (ABDI)
This event is organizied by the Global Environment Facility (GEF) and the Center for Climate and Energy Solutions (C2ES)
2012 marks the 10th anniversary of Navigating the American Carbon World (NACW), North America's largest and most anticipated carbon conference. Over the last decade, NACW has been known as the most trusted and reliable event for getting updates and insights into climate policy and carbon market information. The event features the most forward-thinking minds that are driving action to address global climate change. And, because of the depth and diversity of its delegates, who represent business, NGOs, academia and government agencies, it is known as the single best place for networking and collaborating. NACW 2012 will take place April 10-12 in San Francisco and will present a detailed look at California's cap-and-trade program and other types of mitigation, as well as current and potential linkages between state-level, regional and international carbon markets and sub-national REDD programs. The event is hosted by the Climate Action Reserve. For additional information, please visit www.nacw2012.com.