Flood frequencies and intensities in the U.S. are set to increase as the climate continues to warm – an unfortunate fact for a country with a flood insurance program steeped in debt.
A draft of the fourth U.S. National Climate Assessment report has been completed for review and the news (predictably) is not great for the millions of Americans who live in flood-vulnerable areas. The comprehensive report – which you can find here – discusses the overwhelming body of evidence supporting climate change and details numerous climatic trends visible today such as increasing temperatures, sea level rise, and increasing ocean acidification. All of the key findings, summarized here, present their own policy issues, but this post will focus on two:
- Heavy precipitation events in most parts of the US have increased in both intensity and frequency since 1901 and are expected to continue increasing (p. 301).
- Global mean sea level has risen 7-8 inches since 1900, with ~3 of those inches occurring since 1993. It is very likely to rise another quarter to half foot by 2030 (pg. 493).
These findings should not be particularly surprising to anyone who studied climate science in high school – as the atmosphere warms, it’s able to hold more moisture; as the planet warms, less water is stored as ice at the poles, causing sea level to rise. While not surprising, these findings promise to exacerbate flood costs, a fact that poses a policy challenge for a country where the federal program tasked with reducing flood losses – the National Flood Insurance Program – is already over $23 billion in debt.
Flood damage is expensive. The National Flood Insurance Program has paid out more than $42 billion in claims since 1996, while providing over $4 billion in the form of Individual Assistance. NOAA estimates that during the same period flooding caused $62.0 billion dollars in losses, with this figure only taking into account billion-dollar flood events. With increased storm intensity and higher storm surges, the economic losses due to flood are bound to increase drastically.
How the Feds Became Insurance Salesmen:
Flood insurance has always been a bad bet. The insurance business model relies on two things: 1) premiums being paid into the system by a large number of people with varying levels of risk, and 2) paying out a small number of claims (relative to the population) at any one time. Flood insurance breaks both of these rules. First, while flood can happen to almost anyone regardless of location (due to flash flooding, poor drainage, blockages etc.) the perceived risk is highly concentrated geographically among a relatively small percentage of the population. Second, when floods do occur, companies are required to make large payouts to large numbers of people at once. In the U.S. this was demonstrated perfectly with the decimation of the private flood insurance market after the Great Mississippi Food of 1927, which caused an astounding (and unpayable) $1 billion in damages, a third of the federal budget at the time.
What followed was 40 years during which flood insurance was virtually unavailable in the United States. There were multiple federal attempts to come up with a solution under Truman and Eisenhower, but it wasn’t until 1968, when LBJ signed the National Flood Insurance Act into law, that flood insurance was once again available in the U.S.
Billions In Debt
The national flood insurance program was intended to be self-funding, and it was for 39 years; however, it has been on the U.S. Government Accountability Office’s high risk list since 2006 when Hurricane Katrina plunged the program into debt. As of August 2016, the program owed $23 billion in borrowed funds to the Department of the Treasury. There are a number of issues contributing to program’s monetary troubles (for example, low market penetration, overpaying private insurance companies, which underwrite the insurance policies for the NFIP, by as much as 16.5 percent, or charging low premiums that don’t reflect actual risk because of antiquated flood models); however, major disasters are the main driver of the program’s debt, namely Hurricane Katrina and Hurricane Sandy.
Unfortunately, the structure of the NFIP plays right into the issues inherent to flood insurance. Structures in high risk areas are required to have flood insurance, so policies are concentrated in areas most likely to flood. At the same time, the fact that the program is government-run leads to a great deal of political pressure to keep premiums low, despite the increased risk that property owners may face. A great example of this is the Biggert Waters Act, passed in 2012, which tried to incrementally increase flood insurance premiums to actuarial rates, getting rid of government subsidies. Just two years later, in 2014, public outrage over Biggert-Waters resulted in the Homeowner Flood Insurance Affordability Act, which slowed the premium hikes required by Biggert-Waters and added grandfathering back into the program.
More intense storms and higher coastal storm surges do not bode well for the already indebted National Flood Insurance Program, but what is the solution? We could reduce risk on the front end by preventing further development in floodplains. This is a great idea, if a little politically volatile, but it does nothing about the millions of structures that already exist in areas of high flood risk. With the costs of running a government backed flood insurance program due to increase, we will need to rethink the way we do flood insurance.
Luckily, there are many examples of functioning flood insurance markets from other countries. For example, France, much like the U.S. has a federally backed flood insurance system. The difference between the French system and the American system, however, is that flood insurance is bundled with homeowners insurance, thus everyone pays a low premium and everyone has flood insurance. Germany has a more laissez faire approach to flood insurance, with coverage being optional and sold through private insurers with no government participation. Flood insurance costs are high in Germany, but high costs are viewed as an incentive to not build homes in the floodplain.
As flood risk increases, the U.S. is going to have to re-evaluate how it deals with floodplain management and flood insurance. There are a number of directions we could choose to move in, from revising the current National Flood Insurance Program to be more resilient to encouraging the growth of the private flood insurance market, which has become more viable in recent years. The National Flood Insurance Program has made a number of necessary improvements over the last 10 years, but the combination of political pressure to keep premiums low and increasing flood risk due to climate change present the program with no choice but to adapt or die.