Federal flood insurance is a mess and it's going to be expensive to fix


This year is the 50th anniversary of the National Flood Insurance Program, and this federally subsidized program has not aged well. In 2017, it had the second-highest claim loss year in its history and several recent hurricanes have exposed fundamental flaws in the NFIP.

Recent storms may portend a wetter future, and when combined with sea-level rise, large parts of the country are at risk.

Floods are the most common and destructive natural disaster in the United States and have affected all 50 states in the past five years, leaving the NFIP with a reported $20 billion debt and a diminished borrowing authority before calculating 2018 losses.

Since 2004, the program has borrowed $39.4 billion from the federal government and is expected to continue to lose $1.4 billion a year.

When the NFIP was formed 50 years ago, its goal was to provide a viable market that would be supported by the premiums paid by the people who were insured. At the time, private insurers had little interest in the market.

The program's goals remain laudable: Provide affordable flood insurance, improve flood-plain management and develop maps to identify areas prone to inundation. 

Unfortunately, despite sophisticated modeling that can simulate flood risk, many properties are in locations that make them very expensive to insure.

Since insurers will only  take on risks that give them a reasonable expectation of a return on investment, the private market represents only 15 percent of insured flood risks as of 2017. The NFIP offers subsidized rates to coastal and inland properties in Special Flood Hazard Areas but these rates don't generate enough money to pay the losses covered by the NFIP. 

According to CoreLogic, about a quarter of residential and commercial properties in the country are at high or moderate risk of flooding, but are outside designated high-risk areas. Only 28 percent of the owners of properties in high-risk areas purchase flood insurance.

In the last 50 years there has been an explosion of development in what is called the 100-year flood plain. Today, 41 million people (about 13 percent of the U.S. population) live in areas of potential inundation. The flood plains contain more than $5 trillion in assets.

Officials must consider development, infrastructure and populations when planning communities, but the data change often, so the risk assessment is often flawed when the data do not reflect current and expected conditions. 

The NFIP developed maps of flood-hazard zones, but they are often out of date. For example, about two-thirds of the flooding caused by Hurricane Harvey occurred outside of the program's Flood Hazard Areas.

Simply, NFIP is broken. In 2016, the Government Accountability Office made recommendations to fix its deficiencies. Those were the same recommendations it made in 2008 and again in 2013. They were never addressed because they were so expensive.

Consistently, reports suggest three fixes to the program: Require that properties subject to inundation buy flood insurance, modify premiums in the higher risk communities to reflect the actuarial cost of the risk, and limit the amount of insurance available to properties that previously flooded or create policies that restrict rebuilding in high-risk areas. 

Congress can't agree on how to reform flood insurance. Reform bills are often derailed by special interest groups, such as developers, real estate agents and even well-intentioned consumer advocates. Lawmakers also face opposition from constituents who want to avoid higher premiums.

In 2012, the bipartisan Biggert-Waters Flood Insurance Reform Act sought to phase out rate subsidies and impose actuarially sound premiums. Artificially suppressed rates started increasing. Two years later, Congress reinstated the rate subsidies because some property owners were facing premium increases of 800 percent in some cases.

Fixing rate subsidies cannot, alone, fix the problem. We need to consider the possibility that our approach to flood insurance is flawed.

How far should we go to accommodate those choosing to build or live in high-risk areas? How do we continue to offer insurance at subsidized rates? How do we require the purchase of flood insurance for property owners who are unaware that their property is at risk because of flawed NFIP maps? 

It will take substantial engagement of all stakeholders to push for changes in public policy that recognize and address the inevitability of flooding.