The National Flood Insurance Program
The National Flood Insurance Program aims to reduce the impact of flooding on private and public structures. It does so by providing affordable insurance to property owners and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures. Overall, the program reduces the socio-economic impact of disasters by promoting the purchase and retention of general risk insurance, but also of flood insurance, specifically.
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Previously reported – February 2022
The NFIP: Solving Congress’s Samaritan’s Dilemma
Lawmakers’ commitment to a subsidy‐free system has been imperfect from the beginning, and they have backslid in recent years.
Conclusion
Federal flood insurance arose as a policy device with two purposes: to reduce the use of post‐disaster congressional appropriations for disaster relief and to impose the cost of rebuilding on the owners through premiums. This has been partially successful. The percentage of pre‐FIRM structures receiving subsidized coverage has fallen from 75 percent in 1978 to 13 percent in 2018. But some degree of taxpayer subsidy remains and has recently grown. After Hurricane Sandy and subsequent FEMA flood map updating, Congress protected owners from rate increases by grandfathering structures so that they now pay rates that are below actuarially fair levels in relation to the specifics of their flood zones and the degree to which they are elevated above the floodplain. Moreover, enforcement of the elevation requirement is spotty at best. The appearance in recent years of private flood insurance may seem to be a hopeful sign that federal flood policy is moving toward something more consistent with the nation’s ethos. However, these insurers’ entry into the market appears to be the product of cross subsidies within the federal program, not an overall move to replace government protection with private insurance coverage. Once the overcharged properties have largely been moved out of the NFIP and in to private coverage, the remaining policies will likely be explicitly subsidized—either with direct aid following a disaster or with government subsidies to purchase private insurance. It is unclear whether that would be better than the current system. The existence of private flood reinsurance suggests that claims about the impossibility of private provision of flood insurance are incorrect. But even if that’s true, there is still the question of whether property owners who currently receive cross subsidies for their waterfront properties are willing to pay actuarially fair rates—and what happens if they do not and then are struck by floodwaters. The NFIP raises other important policy questions. Is the 50 percent “substantially damaged and substantially improved” trigger the right threshold to require property owners to elevate their buildings above BFE? What should be done about the poor enforcement of the BFE requirement? There is also the question of what—if anything—to do about structures that predate federal flood insurance, do not have mortgages, and do not purchase federal flood insurance. Ideally, these structures should present no policy problems at all: their owners are neither asking for nor receiving subsidy and are bearing the cost of their risk taking; moreover, the emergence of a private flood insurance market may provide them with products that they do find attractive. If neither they nor policymakers are time‐inconsistent on this arrangement, these property owners should be allowed to continue to choose and bear flood risks. But even they receive indirect subsidy through federal grants for local infrastructure following disasters. In short, the NFIP was an important decision by Congress to move away from providing ad hoc disaster aid to flood victims at taxpayer expense. But lawmakers’ commitment to a subsidy‐free system has been imperfect from the beginning, and they have backslid further from that in recent years. The NFIP needs to reembrace the goal of insureds paying actuarially fair premiums. Hopefully, the recent appearance of private flood insurers in the marketplace will help with this and not merely cherry‐pick cross subsidies in the current system. More hopefully, these private insurers will not suffer the financial wipeout that felled their predecessors a century ago.
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Previously reported – May 2023
FEMA Releases New Flood Insurance Rates by ZIP Code. Brace for Impact.
When the Federal Emergency Management Agency unveiled its new Risk Rating 2.0 methodology for calculating flood insurance, advocates and critics alike warned that it would mean higher premiums for thousands of property owners, especially in low-elevation coastal areas. Now, the full impact of the sticker shock is becoming clear, thanks to new data released by FEMA that shows price increases – and decreases – by county and by ZIP codes. But some spots will see decreases under RR 2.0, which is based less on FEMA’s much-criticized flood maps and more on a multitude of factors, including rainfall levels, elevation, a home’s distance from water, and rebuilding costs. Existing property owners won’t feel the pain all at once. Federal law limits the rate increases to no more than 18% annually on renewals. For people buying new policies, though, the full impact will be painfully obvious. For the past year, FEMA has required new policies to be rated under RR 2.0. He also noted that some prospective home buyers may not be aware of the soaring premiums. If the seller doesn’t explain about the new rating system, which grandfathers in existing owners, buyers could easily assume that their rates will remain the same.
The FEMA spreadsheet with all U.S. ZIP codes can be downloaded here.
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Previously reported – August 2023
FEMA’s New Rate-Setting Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform
FEMA’s National Flood Insurance Program is charged with keeping flood insurance affordable and staying financially solvent. But a historical focus on affordability has led to insurance premiums being lower than they should be. The program hasn’t collected enough revenue to pay claims and has had to borrow billions from the Treasury. FEMA revamped how it sets premiums in 2021—more closely aligning them with the flood risk of individual properties. But affordability concerns accompany the premium increases some will experience. We recommended that Congress consider creating a means-based assistance program that’s reflected in the federal budget.
What GAO Found
In October 2021, the Federal Emergency Management Agency (FEMA) began implementing Risk Rating 2.0, a new methodology for setting premiums for the National Flood Insurance Program (NFIP). The new methodology substantially improves ratemaking by aligning premiums with the flood risk of individual properties, but some other aspects of NFIP still limit actuarial soundness. For example, in addition to the premium, policyholders pay two charges that are not risk based. Unless Congress authorizes FEMA to align these charges with a property’s risk, the total amounts paid by policyholders may not be actuarially justified, and some policyholders could be over- or underpaying. Further, Congress does not have certain information on the actuarial soundness of NFIP, such as the risk that the new premiums are designed to cover and projections of fiscal outlook under a variety of scenarios. By producing an annual actuarial report that includes these items, FEMA could improve understanding of Risk Rating 2.0 and facilitate congressional oversight of NFIP.
Risk Rating 2.0 is aligning premiums with risk, but affordability concerns accompany the premium increases. FEMA had been increasing premiums for a number of years prior to implementing Risk Rating 2.0. By December 2022, the median annual premium was $689, but this will need to increase to $1,288 to reach full risk. Under Risk Rating 2.0, about one-third of policyholders are already paying full-risk premiums. Many of these policyholders had their premiums reduced upon implementation of Risk Rating 2.0. All others will require higher premiums, including 9 percent who will eventually require increases of more than 300 percent. Further, Gulf Coast states are among those experiencing the largest premium increases. Policies in these states have been among the most underpriced, despite having some of the highest flood risks.
Annual premium increases for most policyholders are limited to 18 percent by statute. These caps help address some affordability concerns in the near term but have several limitations.
- First, the caps perpetuate an unfunded premium shortfall. GAO estimated it would take until 2037 for 95 percent of current policies to reach full-risk premiums, resulting in a $27 billion premium shortfall (see figure below). The costs of shortfalls are not transparent to Congress or the public because they are not recognized in the federal budget and become evident only when NFIP must borrow from the Department of the Treasury after a catastrophic flood event.
- Second, the caps address affordability poorly. For example, they are not cost-effective because some policyholders who do not need assistance likely are still receiving it. Concurrently, some policyholders needing assistance likely are not receiving it, and the discounts will gradually disappear as premiums transition to full risk.
- Third, the caps keep NFIP premiums artificially low, which undercuts private-market premiums and hinders private-market growth.
An alternative to caps on annual premium increases is a means-based assistance program that would provide financial assistance to policyholders based on their ability to pay and be reflected in the federal budget. Such a program would make NFIP’s costs transparent and avoid undercutting the private market. If affordability needs are not addressed effectively, more policyholders could drop coverage, leaving them unprotected from flood risk and more reliant on federal disaster assistance. Addressing affordability needs is especially important as actions to better align premiums with a property’s risk could result in additional premium increases.
FEMA has had to borrow from Treasury to pay claims in previous years and would have to use revenue from current and future policyholders to repay the debt. NFIP’s debt largely is a result of discounted premiums that FEMA has been statutorily required to provide. In addition, a statutorily required assessment has the effect of charging current and future policyholders for previously incurred losses, which violates actuarial principles and exacerbates affordability concerns. Even with this assessment, it is unlikely that FEMA will ever be able to repay the debt as currently structured. For example, with the estimated premium shortfalls, repaying the debt in 30 years at 2.5 percent interest would require an annual payment of about $1.9 billion, equivalent to a 60 percent surcharge for each policyholder in the first year. Such a surcharge could cause some policyholders to drop coverage, leaving them unprotected from flood risk and leaving NFIP with fewer policyholders to repay the debt. Unless Congress addresses this debt—for example, by canceling it or modifying repayment terms—and the potential for future debt, NFIP’s debt will continue to grow, actuarial soundness will be delayed, and affordability concerns will increase.
Risk Rating 2.0 does not yet appear to have significantly changed conditions in the private flood insurance market because NFIP premiums generally remain lower than what a private insurer would need to charge to be profitable. Further, certain program rules continue to impede private-market growth. Specifically, NFIP policyholders are discouraged from seeking private coverage because statute requires them to maintain continuous coverage with NFIP to have access to discounted premiums, and they do not receive refunds for early cancellations if they switch to a private policy. By authorizing FEMA to allow private coverage to satisfy NFIP’s continuous coverage requirements and to offer risk-based partial refunds for midterm cancellations replaced by private policies, Congress could promote private-market growth and help to expand consumer options.
Why GAO Did This Study
NFIP was created with competing policy goals—keeping flood insurance affordable and the program fiscally solvent. A historical focus on affordability has led to premiums that do not fully reflect flood risk, insufficient revenue to pay claims, and, ultimately, $36.5 billion in borrowing from Treasury since 2005. FEMA’s new Risk Rating 2.0 methodology is intended to better align premiums with underlying flood risk at the individual property level. This report examines several objectives, including (1) the actuarial soundness of Risk Rating 2.0, (2) how premiums are changing, (3) efforts to address affordability for policyholders, (4) options for addressing the debt, and (5) implications for the private market. GAO reviewed FEMA documentation and analyzed NFIP, Census Bureau, and private flood insurance data. GAO also interviewed FEMA officials, actuarial organizations, private flood insurers, and insurance agent associations.
Recommendations
GAO recommends six matters for congressional consideration. Specifically, Congress should consider the following:
- Authorizing and requiring FEMA to replace two policyholder charges with risk-based premium charges
- Replacing discounted premiums with a means-based assistance program that is reflected in the federal budget
- Addressing NFIP’s current debt—for example, by canceling it or modifying repayment terms—and potential for future debt
- Authorizing and requiring FEMA to revise NFIP rules hindering the private market related to (1) continuous coverage and (2) partial refunds for midterm cancellations
GAO is also making five recommendations to FEMA, including that it publish an annual report on NFIP’s actuarial soundness and fiscal outlook. The Department of Homeland Security agreed with the recommendations.
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Previously reported – October 2023
Flood-Insurance Program Faces a Backlash—and a Deadline
Home-purchase closings could be derailed if it lapses
A federal program that provides critical flood insurance is set to lapse unless renewed by the end of the month, potentially stranding new home buyers in need of coverage. The National Flood Insurance Program provides a safety net for the increasing number of communities that are vulnerable to flooding and might not have access to any other coverage. Now lawmakers are deadlocked over extending the program, which is facing a backlash over a new pricing model intended to make premiums better reflect a home’s risk. “The only thing worse than what we have is nothing,” said Sen. John Kennedy (R., La.), whose bill to extend the program by one year was blocked last week. Congress may find a way to renew the program before it lapses on Oct. 1 or shortly after, as in years past, through legislation that is either separate from or part of the budget fight to prevent a government shutdown. The deadline comes at a critical juncture for the 55-year-old program. The Federal Emergency Management Agency is being sued by 10 states that want to block the program’s revamped pricing, which was intended to help address its decadelong funding shortfalls and to prevent homeowners in relatively low-risk areas from continuing to subsidize those in flood-prone ones. The new pricing will take several years to be fully implemented and result in rate hikes for two-thirds of the program’s 4.7 million policyholders, according to the Government Accountability Office. The states suing FEMA say the new rates could drive people out of flood zones, slam property values and even lead to people losing their homes because they can no longer afford insurance that is a condition of their mortgages. Average annual premiums will eventually more than double in 12 coastal and landlocked states under the revamp, according to a report this week by First Street Foundation, a research firm. The county with the steepest increase is in Louisiana, where the average premium in Plaquemines Parish will surge more than sixfold to $5,431 from $842 in coming years once the new premiums are in full effect, according to First Street. “Flood insurance policies have become their own natural disaster,” said Jeff Landry, the attorney general for Louisiana who is leading the states’ lawsuit. Other states where average premiums more than doubled include hurricane-prone Florida and Mississippi, as well as Kentucky, South Dakota and West Virginia. David Maurstad of the National Flood Insurance Program said that FEMA doesn’t have the authority to consider affordability when setting premiums but that the agency “continues to work with Congress to examine flood insurance affordability options.” Previously, premiums were based on an outdated model that FEMA said no longer accurately reflected a home’s risk of flooding. Critics said the cheap insurance encouraged people to buy pricey homes in flood-prone areas, in part by repeatedly bailing them out. More than 3,000 properties had 10 or more claims from 1978 through 2022, according to FEMA. Nearly two-thirds of those were in five states: Louisiana, Texas, New Jersey, Missouri and New York. To help shore up its funding, FEMA last year asked Congress to consider letting it drop coverage on properties that received four or more claim payments of at least $10,000. Congress has yet to take any action. Since the program caps rate increases at 18% a year, it will take until 2037 before the new premiums are being charged for 95% of current policies, the GAO estimated. That delays the full impact of rate increases for several years for policyholders but leaves the program with $27 billion less in premium revenue than it otherwise would have. Already, the program’s failure to charge adequate rates for years has dug it deep into debt. It is paying $1.7 million in interest a day to the Treasury on $20.5 billion in loans, even after Congress forgave it $16 billion of debt in 2017. Meanwhile, the program has lost almost a million policyholders since 2009, despite floods becoming more frequent and costly. In counties affected by Hurricane Idalia last month, fewer than one in five homes on average had federal flood insurance, according to an analysis for The Wall Street Journal by private insurer Neptune Flood. A failure by Congress to renew the program wouldn’t stop claims from being paid. But it could affect home purchases in high-risk flood zones and derail thousands of closings in the peak of hurricane season, according to the Insurance Information Institute, an industry group. In the last six years, lawmakers have allowed the program to lapse briefly three times, according to FEMA. It isn’t yet clear how lawmakers will try to extend the program. A renewal could be included as a provision in any temporary funding legislation to keep the government running. Sen. Kennedy of Louisiana is also expected to again try and pass his legislation for an extension. His attempt last week was blocked by Sen. Mike Lee (R., Utah), who said he wasn’t willing to agree to “yet another hollow promise” of reforms. “It’s a broken subsidy program,” Lee said.
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Previously reported – November 2023
National Flood Insurance Program: Reauthorization
Congress must periodically renew the NFIP’s statutory authority to operate. On November 17, 2023, the President signed legislation passed by Congress that extends the National Flood Insurance Program’s (NFIP’s) authorization to February 2, 2024.
Congress must now reauthorize the NFIP
by no later than 11:59 pm on February 2, 2024.
The Flood Insurance Program is Sinking:
The actual words of David Maurstad, the federal official in charge of the Nation Flood Insurance Program, were “the NFIP is not fiscally sustainable in its present form” when he spoke with reporters in late October. That may not be a surprise, but what hasn’t generally been reported is the wholesale reform package that the Biden administration has proposed to Congress.
First, some background. With more than 4.7 million policies, FEMA has borrowed over $20 billion to stay afloat and nearly ran out of money in September. Even with the much-maligned Risk Rating 2.0 NFIP premium increases, the program is struggling to deal with hurricanes and fires at a time when those disasters might be fewer in number but are increasing in cost. Given that background, the Biden administration has sent Congress no less than 17 proposals to overhaul the NFIP.
Here’s a short list of some of the most important points of this package –
- Requires communities participating in the NFIP risk reduction plan to establish minimum flood-risk reporting requirements for residential sellers and lessors.
- Allows for the use of replacement cost value in determining premium rates to “more accurately signal policyholders’ true risk.”
- Creates separate classes for coastal versus inland flood zones in the NFIP’s rate tables.
- Provides a means-tested assistance program for offering a graduated discount benefit for low- and moderate-income households.
- Prohibits coverage for new construction in high-risk areas and prohibits [presumably new] coverage for all commercial properties “to promote the growth of the private market….”
- Prohibits coverage for “excessive loss properties” or properties that flood repetitively and require insurance payouts of at least $10,000 each time.
These are obviously major changes, and there are more we haven’t listed. Congress has shown little interest in tackling NFIP reform, preferring to kicking the can down the road with two dozen extensions of the existing program. That means these proposals may be dead in the water. However, having to forgive over $20 billion in outstanding debt to the Treasury (which will happen next year or very soon after) plus inevitably needing to provide more billions to enable the program to stay afloat may be just the impetus Congress needs to face reality.
To be clear on why the can keeps getting kicked, there is no doubt that members of congress recognize the problem with the program – premiums are too low and do not reflect actual risk exposure carried by the program. Yet these same members are essentially held hostage by their voter bases to ensure NFIP premiums stay low. Because constituents simply do not want to pay more, supporting more expensive premiums (which reflect actual risk) puts members’ re-election on the line.
WATERLOG – November Newsletter
Previously reported – January 2024
More states deciding home buyers should know about flood risks
‘It’s a recognition that flooding is only going to get worse and that they need to take action now to protect home buyers and renters,’ says one advocate
Hours into a marathon meeting earlier this month, and with little fanfare, the North Carolina Real Estate Commission gave its blessing to a proposal that could have profound impacts in a state where thousands of homes face threats from rising seas, unprecedented rainfall and overflowing rivers. Soon, anyone who sells a home in the state will be required to disclose to prospective buyers far more about a property’s flood risks — and flood history. Rather than merely noting whether a home is in a federally designated flood zone, they will have to share whether a property has flood insurance, whether any past flood-related claims have been filed, or if the owner has ever received any federal assistance in the wake of a hurricane, tidal inundation or other flood-related disaster. With the changes, North Carolina became the fourth state this year to embrace more stringent disclosure requirements, joining South Carolina, New York and New Jersey. Advocates say the shifts, which for the most part encountered little outward opposition, represent an acknowledgment that flood risks are surging throughout the country and that more transparency about those risks is a common-sense measure that could mean more homes have flood insurance and fewer buyers face catastrophic surprises. “It’s a recognition that flooding is only going to get worse and that they need to take action now to protect home buyers and renters,” said Joel Scata, a senior attorney at the Natural Resources Defense Council, which tracks flood disclosure laws around the country. “It’s also a recognition of the importance of transparency and fairness.” The changing disclosure policies come at a time when scientists say the nation’s coastlines will experience as much sea level rise in the coming few decades as they have over the past century. They also have documented how the warming atmosphere is creating more powerful storms and more torrential and damaging rainfalls, which already are inundating communities where aging infrastructure was built for a different era and a different climate. The more stringent rules adopted this year also follow a path set by some of the country’s most flood-battered states. Louisiana, facing massive land loss from rising seas and the prospect of stronger storms, has what environmental advocates and even the Federal Emergency Management Administration agree is one of the most robust sets of disclosure laws in the nation. Likewise, in the wake of cataclysmic flooding caused by Hurricane Harvey in 2017, Texas adopted new rules that have also made the state a model for flood disclosure. But even as several additional states finalized new disclosure rules in 2023, many others still do not require sellers to divulge to buyers whether a home has previously flooded. That includes places such as Florida, which faces significant and rising risks from hurricanes, climate-fueled rain bombs and inland flooding along rivers. According to NRDC, more than one-third of states have no statutory or regulatory requirement that a seller must disclose a property’s flood risks or past flood damage to potential buyers. Others have varying degrees of requirements — a patchwork that means where people live can greatly influence how much they actually know about the flood risks of a home they buy or rent. “There are still too many states who keep home buyers in the dark,” Scata said. “That needs to change. Flooding is only going to become more severe due to climate change. And people have a right to know whether their dream home could become a nightmare due to flooding.” Earlier this year, FEMA proposed federal legislation that would require states to mandate certain minimum flood risk reporting requirements as a condition for ongoing participation in the National Flood Insurance Program. The agency said having a nationwide requirement would “increase clarity and provide uniformity” in many real estate transactions, but it has not yet become a reality. That lack of action on Capitol Hill has not stopped individual states from moving forward. In June, the South Carolina Real Estate Commission added new questions to the state’s residential disclosure that go into far more detail than before, including whether a homeowner has filed public or private flood insurance claims or made flood-related repairs that weren’t submitted to an insurer. “It’s definitely a step in the right direction,” said Nick Kremydas, chief executive of South Carolina Realtors, which publicly supported the enhanced disclosure requirements. Still, he said he hopes Congress will eventually allow buyers to access FEMA’s database of flood claims for individual properties. “That’s the best-case scenario.” Over the summer, New Jersey’s legislature overhauled what NRDC had labeled the state’s “dismal” disclosure requirements, instead putting in place new rules that require sellers to document a wide range of flood-related information. In addition, it requires that purchasers in coastal areas be warned about the potential impacts of sea level rise. “The idea is that the more people understand about the hazards, the more they can incorporate that into their decision-making, and the more they can have ownership of those decisions,” said Peter Kasabach, executive director of New Jersey Future, a nonprofit that advocates smarter growth and resilience policies. In September, New York Gov. Kathy Hochul (D) signed similar legislation, calling it a “monumental step” toward protecting residents from the increasing impacts of climate change. In addition to mandating more detailed flood information, it eliminated a previous option that allowed sellers to provide a $500 credit at closing in exchange for waiving the disclosure requirement. The legislation followed a similar measure from late 2022, requiring flood disclosures for renters. “This is a person’s home, and they should be warned,” said New York State Assembly member Robert Carroll (D), a prime sponsor of the disclosure bills. “This is really about knowledge and proper warning.” In large swaths of the country, there is little doubt that more properties are likely to face flooding risks over time. A report last year by the National Oceanic and Atmospheric Administration, NASA and other federal agencies projected that U.S. coastlines will face an additional foot of rising seas by 2050. NOAA has detailed how specific places are likely to see a sharp rise in high-tide, or nuisance, flooding, and that coastal flood warnings “will become much more commonplace” in coming decades. Likewise, scientists have documented an abnormal and dramatic surge in sea levels along the U.S. gulf and southeastern coastlines since about 2010, and other researchers have warned that the nation’s real estate market has yet to fully account for the expanding threats posed by rising seas, stronger storms and torrential downpours. In a study last year commissioned by NRDC, the independent actuarial consulting firm Milliman found that in New Jersey, New York and North Carolina, 28,826 homes sold in 2021 — 6.6 percent of total sales — were estimated to have been previously flooded. In addition, the firm found that expected future annual losses for a home with previous flood damage are significantly higher in each state than for the average of all homes, regardless of flood damage, in that state. Because one of the best indicators of whether a house will flood is whether it has flooded before, meaningful disclosure requirements are crucial, said Brooks Rainey Pearson, legislative counsel for the North Carolina branch of the Southern Environmental Law Center, which last year petitioned the state’s real estate commission on behalf of multiple environmental and community groups to make the disclosure changes. “People can take steps to protect themselves when you give them the information they need,” she said. “It matters, because with climate change we are seeing more frequent flooding events, including more intense storms and more flooding of houses. It’s a huge investment for a family to make to buy a house. People deserve to know whether the house they are purchasing has flooded or could flood.” Pearson says she hopes the changes coming to North Carolina and other states will help illuminate otherwise unknown risks and ultimately help reduce the number of homeowners who are displaced and devastated financially after storms such as Hurricane Florence, which battered her state in 2018. “What it comes down to,” she said, “is giving the buyer the information they need to make smart decisions.”
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