Can the National Flood Insurance Program survive its growing debts?

The National Flood Insurance Program, which protects millions of Americans from flood damage, is set to expire at the end of September. What’s next for America’s debt-saddled flood insurance system?

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a senior reporter and certified personal finance counselor at Policygenius, where he covers insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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The National Flood Insurance Program is how millions of Americans protect their finances from flooding, since a typical homeowners insurance policy doesn’t cover flood damage. The program is set to expire at the end of September unless Congress acts, which would leave policyholders unprotected in the midst of hurricane season. Despite its importance, Congress has only approved short-term extensions for the NFIP since 2017, and allowed it to lapse three times. [1]

The NFIP faces an uncertain future, even beyond the looming reauthorization deadline. Increased flooding, in part due to climate change, has put the program more than $20 billion in debt. [2] As they consider extending the program, members of Congress and the Biden administration are weighing reforms to make the program more affordable and put it on more solid financial footing. Here’s what you need to know about the future of flood insurance.

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The NFIP: Good intentions, unintended consequences

The NFIP was created in 1968 to help address the huge costs the federal government was bearing to respond to flood disasters. The program, which is managed by the Federal Emergency Management Agency, has since paid almost $70 billion in flood insurance claims. [3]  

“Ever since then they’ve been fiddling at the margins with trying to adjust the program to keep it financially solvent and to meet the needs of the growing impact of flood losses in the United States,” says Sam Brody, a professor at Texas A&M University and director of its Institute for a Disaster Resilient Texas.

Brody testified in June at a hearing before the Senate Banking, Housing, and Urban Affairs Committee on the NFIP reauthorization. He sees reauthorization as an opportunity to discuss the pros and cons of the NFIP, and how to improve it. One of the biggest drawbacks of the NFIP is that by insuring against flood damage, it may be incentivizing people to live in flood-prone areas. 

“The whole flood system admits failure,” Brody says. “You’re going to flood if you live here, we’ll provide insurance.” 

Worsening impact of flooding

Flooding has become more costly since the founding of the NFIP. Insured losses increased by an average of $109 million a year from 1978 to 2018. [4] Many losses occur outside of areas the NFIP considers “high-risk.” 

If you take out a mortgage for a home in a Special Flood Hazard Area, as defined by the NFIP, you’re required to get flood insurance for the mortgage to receive federal backing. But people who live outside of these high-risk areas file more than a quarter of NFIP claims and receive a third of disaster assistance. [5] In practice, the high-risk area is bigger than FEMA’s flood maps indicate, and it’s growing.

“That trend is increasing, mostly because of the way communities are building and putting impervious surfaces down,” Brody says. “It’s expanding the floodplain faster than FEMA can map it.”

Recent flooding in Kentucky killed more than 40 people and damaged or destroyed hundreds of homes, but very few people in the affected areas had flood insurance. [6] As climate change makes storms more intense, flooding becomes more severe in areas that rarely experienced it in the past, says Chad Berginnis, executive director of the Association of State Floodplain Managers. 

“The need for flood insurance is probably greater than it was 50 years ago,” he says.

Should people pay more for flood insurance?

On its current trajectory, there’s little hope for NFIP to pay back its $20 billion debt without Congressional intervention. Congress canceled $17 billion of its debts back in 2017. The fundamental problem, as laid out by the U.S. Government Accountability Office, is that the program has two competing goals: “keeping flood insurance affordable and keeping the program fiscally solvent.”

This isn’t how private insurance companies operate. The premium you pay for your car insurance, for example, takes into account the risk that you’ll get into an accident and file a claim, and ensures there’s a reasonable chance the insurance company will make money in the end. If your car insurance company was regularly in the hole like the NFIP, it would go out of business. 

FEMA has a tricky balance to strike in how much it charges for NFIP policies. Too low, and it loses money. Too high, and not enough people buy flood insurance. 

An internal FEMA report obtained by the Associated Press revealed that the agency expects 1 million fewer people will buy policies by the end of the decade because of higher NFIP premiums. Getting people to pay more for flood insurance might be a tough ask while the economy verges on a recession.

“I could see how the effort to correctly adjust rates so they’re more actuarially sound is going to cause a lot of people to drop, which won’t fix the problem,” Brody says.

But at current levels, the rates people pay can’t compensate for the losses FEMA has to cover. 

Can the NFIP be fixed?

Continuing to pay to repair houses that flood over and over again can’t be the only solution. Brody says the way to fix the NFIP’s financial issues is to reduce flooding in the first place. He pointed to efforts like the FEMA Community Rating System, which offers discounted flood insurance premiums in areas that take prescribed steps to reduce flooding, like protecting open spaces, elevating structures, and disclosing flood risks. But the Community Rating System is voluntary and complex, which means wealthy, populated areas are more likely to participate, Brody says.

Another option is to say to homeowners in flood-prone areas: You’re on your own. If your house is in a high-risk area and you don’t want to pay for flood insurance, you bear the risk when disaster strikes. “I don’t think that’s the best way to go,” Brody says, in part because the government created the problem by insuring people in flood zones for decades.

“There’s no easy answers,” he says. “If we really want to keep insurance rates subsidized and affordable, the best way is to not have flooding.” Reducing flooding of homes and businesses will mean halting development in flood-prone areas and buying people out of their homes. This will be expensive. But the current trajectory of the NFIP is unsustainable, Brody says.

How to protect your home from flooding

The higher NFIP rates will affect about 77% of policies. Pricier premiums might be an unwelcome hit to your budget, but Berginnis says if your rates are going up, it means you were getting a big discount before. The new prices are more reflective of the real risk of flooding, he says. 

Even as private insurers have started offering flood insurance, their prices still might not beat the NFIP in many areas, Berginnis says.

“Look at it as, you were getting a good deal for a lot of years and now you’re actually paying for risk,” he says. He adds, you’re still going to be better off than if you forgo flood insurance.

As flooding becomes more frequent, he advises everyone to take closer stock of their flood risk. If you’re buying a house, find out not only whether the property is likely to flood, but also the places you frequent, like your job, or the local schools. 

“I always tell people, especially if you’re new to a community, understand your risk, understand where those zones are,” Berginnis says. “Talk to your neighbors. Find out if there’s any flooding that isn’t on the maps that you need to know about in order to keep you and your family safe.”

Even if you’re a renter and your landlord is responsible for repairing any property damage from flooding, knowing your flood risk is a safety issue. 

Here are three resources for assessing your flood risk:

  1. FEMA flood maps: These are the official source for flood risk information used by the NFIP. The FEMA website allows you to look up flood hazards by address. Private websites like Risk Factor can also tell you how likely an area is to flood.

  2. Talk to your local floodplain manager: Almost every community has someone in charge of managing flood risks. The Association of State Floodplain Managers keeps a list of the floodplain manager for each state, but your community likely also has a floodplain manager who will be intimately familiar with how flood-prone specific areas are.

  3. Use the Reduce Flood Risk website: The Association of State Floodplain Managers maintains a list of resources and tips for anyone looking to lower their risk from flooding.

Some areas have their own resources. Brody helped create TX Buyers Be-Where, which helps calculate flood risk for properties in Texas. Brody believes colleges around the country should be responsible for creating these resources for their communities.

“The more we communicate the risk to individuals, the better they’ll be able to make decisions,” Brody says. 

If they have the information, people may decide not to live in the riskiest areas. Better decisions around flood risk, in addition to policy reforms, may help the U.S. control the rising cost of flooding, and protect people and property from the physical risks.  

“There’s no quick fix,” Brody says. “But there’s a longer road map that we can establish and start to go down that I think will not just save the federal government money, but save property and lives.”

Image: Ed Bock / Getty