Flood Insurance: Are the Storm Clouds Lifting?


With levees breaking and floods covering much of the Midwest, and with record snow in the Sierra Nevadas soon to start melting and rushing into California's waterways, let's look at where we stand on the renewal of the National Flood Insurance Program. There is reason for optimism about the NFIP, currently set to expire May 31, but there are also significant caveats.

The optimism stems from the fact that the NFIP is finally moving into the 21st century in terms of technology.

Established by Congress in 1968, the program was designed to ensure that affordable flood insurance is available to property owners in vulnerable areas, while requiring that all those in participating communities buy insurance if any financing is in place on the property. But the decisions on vulnerability have been crude. Basically, someone pulls out a paper map, and if it says "flood plain" then you have to buy insurance. If not, not, no matter whether you're on top of a hill in that flood plain or in a low area in a location not generally deemed vulnerable. 

Now, the easy availability of cameras, drones and more sophisticated mapping tools makes it possible to incorporate precise measurements of elevation and determine vulnerability by individual property, not through some decision that three or four square miles constitute a flood plain. In this podcast I recorded with Nick Lamparelli, cofounder and chief underwriting officer of reThought Insurance, he says it's actually possible to take the precision far further: You can, for instance, price flood insurance based not just on how high above ground expensive possessions, such as computer servers, are in a building but on whether they are on a vulnerable side of the building or in a more protected area. Even in today's dysfunctional Washington, the advances in technology are finding their way into the hearings on the NFIP.

Getting the NFIP to deal with models far closer to reality could help with pricing, which has failed to keep up with claims for 15 years. In 2017, for instance, the NFIP took in $3.6 billion in premiums and paid $8.7 billion in claims—not exactly a sustainable situation. Congress forgave $16 billion of NFIP debt in 2016, but the program still is more than $20 billion in the hole. Having prices reflect the actual risk would eliminate the deficits (which have essentially become subsidies by taxpayers for those in vulnerable areas).

But here is where the caveats begin.

Roughly half of those in the NFIP in 2009 have dropped out because they found the prices to be too high. Now imagine that prices rise for the vast majority of people.

I can tell you one thing that will happen: People will complain. And they will find advocates to take up their cause, whether in media or in the halls of government. Already, Senate Minority Leader Chuck Schumer has sounded the alarm on behalf of constituents on Long Island. (Those who benefit from price reductions will quietly pocket their gains.)

Although the NFIP renewal effort has been solidly bipartisan thus far, it's easy to see how divisions might arise. Better understanding of risk will make it clear just what areas have been getting subsidies, and, while both parties might rally behind subsidies for a purple state like Florida, what about a red state like Texas or a blue state like New York? In addition, there is talk of subsidizing insurance for those below a certain income level -- not always an area of common ground for Republicans and Democrats. And don't look now, but the House committee responsible for NFIP legislation is currently run by Maxine Waters, a frequent target of the president's Twitter-ing thumbs.

Even if the NFIP is finally renewed for good, after repeated extensions since 2017, the work won't be done. Climate change will cause new vulnerabilities that will force flood insurance to continue to adapt. 

So, rays of sunshine are breaking through the clouds, but we'll certainly face another storm when a new NFIP pricing model takes effect, and that may be just one of many we still have to outlast. 


Paul Carroll

Paul Carroll

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Paul Carroll

Paul Carroll is the editor-in-chief of Insurance Thought Leadership.

He is also co-author of A Brief History of a Perfect Future: Inventing the Future We Can Proudly Leave Our Kids by 2050 and Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years and the author of a best-seller on IBM, published in 1993.

Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.