Photo: Red Cross

Federal flood insurance reform legislation enacted this year could aid proactive state and local preparedness for climate change, sea level rise, and flooding. The beleaguered National Flood Insurance Program (NFIP) was overhauled in June and the changes should keep the program afloat while some property owners begin to move to higher ground. Those who require flood insurance will face new requirements and higher premiums, which may encourage property owners to move back from areas vulnerable to flooding and coastal inundation.

The Biggert-Waters Flood Insurance Reform Act of 2012 extended the National Flood Insurance Program (NFIP) for five years, at the same time overhauling the 44-year-old statute.  (The law was passed by Congress on June 29 as part of the surface transportation bill Conference Report, H.R. 4348.)

Numerous loopholes and subsidies were removed to ensure the viability of the program in the future.  For starters, those who do not have flood insurance, but reside in a flood plain or newly updated flood hazard zones, will be required to purchase insurance.  Insuring properties with repeated severe loss claims due to flooding will be phased out.  Subsidies for vacation and second homes will also be phased out, along with business properties, homes substantially damaged or improved (i.e., in amounts greater than a percentage of the market value), and homes sold to new owners.  This means less liability burden for the program.  New provisions make it easier to apply for the Federal Emergency Management Agency’s (FEMA) buyout program.  The homes substantially damaged by flooding would be purchased by FEMA and demolished, left as open space so no future claims will be incurred.

Premium increases will be capped at 20 percent each year for newer homes, 25 percent for those built before the NFIP.  Premiums calculated based on “average historical loss year” will now be required to include catastrophic loss years in the averages.  Building codes have also been renovated, requiring property owners to meet stricter flood codes to receive insurance.  Outdated flood maps will be redrawn using the most recent science and techniques.  Many who previously thought they were outside a floodplain will now find themselves in one, requiring insurance.

The NFIP has had somewhat of a rocky past.  The program was originally designed to be self-sustaining.  During times of high claim losses the NFIP could borrow funds from the Treasury Department, paying monies back with interest.  Then the game changed with Katrina and Rita.

Photo: FEMA

Due to the massive cost associated with these two storms, the program has run into debt, roughly $18 billion thus far.  Add to that figure the flood damages of Hurricane Irene ($7 billion) and Hurricane Sandy (estimated $20 billion) and you’re beginning to see the implications.  Storms are costing more, partly because they are stronger, and mostly because people are building in flood-prone areas and the economic value of at-risk properties has increased.  What is clearer than ever is that this debt will never be paid back with the current premium levels alone.   The NIFP is a fiscal time bomb in the making.

Insuring the expensive properties along the coast and in flood plains will soon be much more expensive.  The market is trying to tell us something.  It is suggesting our behavior might be too risky a bet.

Insuring property near the coast is a risky proposition for insurance companies.  The associated risk is why the private market provides expensive flood insurance, if it provides it at all.  In many cases the government, working in partnership with private firms, shoulders the liability, not the company.

The high price of flood insurance is why the NFIP program was created in the first place, to provide affordable flood insurance that all Americans could benefit from.  But the program had an unintended consequence; it subsidized risky behavior of millions living near water and put the American taxpayers on the hook for the check.  As we see with sea level rise due to climate change and increased flooding, the odds are stacked against us.

The federal government simply cannot afford to keep running a deficit in funding claims on unrealistically subsidized flood insurance.  People like reporter John Stossel are admittedly ashamed for scamming the system to pay for their vacation homes, but can you really blame them?  The flood insurance system is what’s at fault here, not the people smart enough to take advantage of it.  But what happens when the music stops playing?

So what’s next?  Premiums will go up in 2013 to start reflecting greater realism about risk.  The hundreds and even thousands of dollars more for bills may price many families out of the most risky flood-prone areas.  People will no longer be able to build and rebuild along vulnerable coastal areas where properties tend to be repeatedly damaged.  Those families being forced out of their homes and neighborhoods can be seen as the victims of a faulty flood insurance program.  Without the NFIP many of those families could not have afforded to build and live there in the first place.

What is clear after the destruction of Sandy is that more and more homes are vulnerable to flooding due to climate change.  The reformed NFIP includes many positive steps to ensure homes meet new stricter codes, flood maps are redrawn, and premiums reflect the actual cost of insurance. Careful planning, along with policies and incentives to encourage people to move out of disaster-prone areas, are needed if the NFIP is to be sustainable.

But more can be done.  A greater emphasis needs to be placed on adaptive preparedness.  We are already committed to a world where flooding and powerful storms may be more prevalent and intense.  Planners, managers, and engineers must start thinking about the future climate and the constraints and stresses that will be placed on the built environment.  Government must change the status quo because storm damage is likely to worsen.

Good briefing paper by the Georgetown Climate Center: Analysis of How the Flood Insurance Reform Act of 2012 (H.R. 4348) May Affect State and Local Adaptation Efforts.

Webcast and materials from a briefing on Insurance Industry Perspectives on Extreme Weather Events on December 14, organized by the Environmental and Energy Study Institute.

Earlier posts:

“The insurance industry is finally waking up and smelling the climate chaos coffee”

New York City struggles with climate impacts preparedness

Hurricane Sandy, climate change, and what is to be done – Q&A with Judith Regan on SiriusXM