Millions of Americans are living a lie. You might be one of them: The homeowners who live near a flooding California river, the landlords in a slowly subsiding Southern city, or the business operators on a shoreline inundated a Nor'Easter's storm surge. And all around the country, the federal government is dramatically undervaluing the risk of flooding to their homes or businesses.
The lie originates from the National Flood Insurance Program, which sets rates for 5 million people living in flood-prone areas---based on flood projections that are sometimes decades out of date. Even when the projections are updated, the program lets people pay the old, underpriced insurance rates. That's left the program $24 billion in debt, running an annual deficit of $1.5 billion. Congress is currently holding hearings to reauthorize the NFIP and put it back in the black. But updated, truthful flood insurance prices could put millions of home and business owners deep in the red.
The insurance business relies on bad things happening, but not to too many people at once, and also somewhat predictably. Floods are typically the opposite: widely destructive and wildly unpredictable. For a long time, private insurers wouldn't cover them. So in 1968, the federal government stepped in with the NFIP. FEMA, the agency in charge of the program, sets its rates on so-called Flood Insurance Rate Maps, which show which properties could conceivably be inundated by an overtopped river, storm surge, or other flooding event. But the maps also determine who must buy flood insurance. So the NFIP rate doesn't just protect people from losing their homes, it influences property values and mortgage rates for millions.
Congress must reauthorize NFIP every five years, and right now it's gearing up to rewrite the reauthorization with hearings in both the Senate and House of Representatives. But they're facing the same issues that have plagued the program for over a decade.
The program's troubles began with Hurricane Katrina. The storm was so destructive, NFIP had to borrow $17 billion from the US Treasury to pay out claims. FEMA, which runs NFIP, hadn't prepared for a storm like that. The storm also exposed a major problem with NFIP's rates: Many of them were (and still are) based on old flood maps. This means they were paying rates that were much lower than they should have been, based on the known risk. Or, even where new flood maps did exist, NFIP would only apply those to new constructions, and grandfather in existing property owners at old, low rates. Suddenly, the program was a huge point of contention in Congress, and, in 2008, legislators failed to reauthorize it.
That didn't mean the program---and its problems---went away. Between 2008 and 2012, Congress passed 16 temporary NFIP extensions. These helped destabilize housing markets, because there were sometimes tiny gaps between extensions. "Even some very short lapses can cause a tremendous ripple effect," says John Dickson, president of NFS Edge Insurance Agency. "Realtors can’t move homes because can’t they rate the risk."
Congress finally reauthorized the act in 2012, and even fixed the grandfathering rule (to some extent). But that meant some rate payers saw huge increases. "If you own a house in a flood zone and the map changes underneath you, it can cause your premiums to go up and your property values to drop," says Lloyd Dixon, director of the RAND Center for Catastrophic Risk Management and Compensation. "That's real money, and they'll write their congressman." So in 2015, Congress rolled back some of these ambitious reforms. This year's reauthorization would seek to find a balance between keeping NFIP solvent without pricing people out of house and home.
This tricky balance extends into homeowner psychology. "The price of a flood insurance policy is an important signal to a homeowner, renter, or business about the flood risk they face," says Trotter. "If NFIP policyholders do not understand their true risk, they may not make the right decisions about how to protect their homes or businesses and their own safety." Because of that, the 2015 update to NFIP requires FEMA to tell homeowners their true flood risk, regardless of their rate. The same law also gradually increases the grandfathered, and therefore undervalued, rates to reflect the actual risk. Sometimes the signal is overwhelming: In 2013, after FEMA redrew the flood maps in parts of New England, a Boston woman's flood insurance jumped to $68,000.
But that doesn't solve all the problems. NFIP still needs new maps, which FEMA's deputy administrator Roy Wright has been hammering on in recent congressional hearings. Last week, he went before the House Financial Services Committee, and today at the Senate banking committee.
The National Flood Insurance Program could help itself by promoting private insurance. In the past five to 10 years, computer analytics have grown to the point where private companies can estimate flood risk. "Geomodels are coming online to help companies understand the things that drive flood risk," says Dickson. These include wind, elevation, and fluid dynamics. "Flood is the only natural disaster where manmade influences can actually impact the scale of the flood itself," he says, so these models also include updated maps on water irrigation systems, what's paved and what's not, and even larger scale, esoteric measurements like shoreline erosion caused by sea level rise.
Congress wants to encourage private insurers. But NFIP's low rates make it difficult for private insurers to compete, and the fact that private insurers can't compete makes it hard for NFIP to raise its rates. Dickson says the current reauthorization could show promise for private flood insurance, if its rates more accurately reflect true risk.
Without an election to contend with, and a united Congress, NFIP's reauthorization is probably in the bag. The biggest struggle will be between the cost-cutting philosophy guiding Congress's ruling party, and the fact that many of them come from states filled with low to mid-income people living in flood zones. Somewhere in that tension, the new truth of American flood protection will emerge.
