Congress Finally Reforms Flood Insurance

Fixing A Broken National Flood Insurance Program: Risks And Potential Reforms

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 …

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Late last week, in a heartening display of bicameral and bipartisan harmony, Congress passed a bill reauthorizing the National Flood Insurance Program (NFIP) and taking steps to steer it toward solvency. Among those steps is ensuring that climate impact projections are factored into future calculations of flood risk.

As we explain in a recent policy brief, the program, which provides federally-backed flood insurance for homes along America’s rivers and coasts, is chronically in debt to the U.S. Treasury because premiums are often too low to cover the actual risk. This gap between revenue and risk may grow as development continues in zones very likely to become more flood-prone as a result of climate change.

The legislation, passed as part of the transportation bill, reauthorizes the NFIP for five years, ending a series of short-term extensions that had kept the program on life support for the past several years. And while the bill does not fix all of NFIP’s problems, it represents a major step towards actuarial pricing and full accounting of climate risk.

As I wrote last week, long-standing subsidies and loopholes have suppressed premiums below what the actual flood risk would require, effectively subsidizing insurance in flood zones. The bill improves the fiscal outlook by barring second homes and commercial homes from receiving subsidized rates. In addition, it raises the cap on annual premium increases from 10 percent to 20 percent, allowing FEMA greater flexibility to adjust rates as flood risk changes over time, and to narrow the gap between premium rates and risk levels for some properties. The reforms stop short of removing all subsidies, however, as grandfathered properties will get to keep their underpriced premiums.

Another problem is that FEMA hasn’t been able to update its flood maps to accurately reflect changes in risk. The bill authorizes a new effort to bring the maps up to date. And although the word “climate” does not appear in the text, the bill directs FEMA to use “the best available science regarding future changes in sea levels, precipitation, and intensity of hurricanes” as it updates the maps and sets its insurance premiums.

As climate change continues to increase the risk of widespread flooding, innovative new strategies will be required to maintain a balance between actuarial soundness (i.e. full-risk pricing) and affordability. Fortunately, Congress appears to understand this need. The bill calls for a series of studies to investigate a variety of cost-saving and risk-reducing measures. It directs FEMA to investigate whether property owners can be encouraged to take steps to reduce their risk if offered discounted premiums in exchange. In addition, Congress authorized a study on the feasibility of shifting some risk from the NFIP to global capital markets through reinsurance purchases.

Enforcing stronger building codes and transferring some of the remaining risk to a private market (i.e. reinsurance) would help complete what this bill has now begun – a long-term overhaul that returns the NFIP to solvency while preparing for rising flood risk in the future.