Federal Flood Insurance Is A Mess And It’ll Be Expensive To Fix

This year is the 50th anniversary of the National Flood Insurance Program, and this federally subsidized program has not aged well.

In 2017, it had the second-highest claim loss year in its history. Hurricanes Harvey, Florence and Michael have exposed fundamental flaws in the NFIP.

These storms may portend a wetter future, and when combined with sea-level rise, devastate large parts of the country unless our leadership takes a critical look at the risk of flooding.

Floods are the most common and destructive natural disaster in the United States and have affected all 50 states in the past five years. Flooding has left the NFIP with a reported $20.525 billion debt to the U.S. Treasury for 2017, and a diminished borrowing authority of $9.9 billion.

And these numbers don't include the 2018 flood damage. Since 2004, the program has borrowed $39.4 billion from the federal government and is expected to continue to lose $1.4 billion a year.

While it's easy to call the NFIP program a disaster, it should be noted that in 1968, when the NFIP was formed, its goal was to provide a viable market that would be supported by the premiums paid by the people who were insured. At the time, private insurers had little interest in the market.

The program's goals remain laudable:

• Reduce the impact of flooding by providing affordable insurance.

• Improve floodplain management.

• Develop maps to identify areas prone to inundation.

Unfortunately, despite the sophisticated modeling that can simulate low- and high-intensity floods, many properties are in locations that make them very expensive to insure.

A private marketplace for certain flood risks continues to grow, but insurers and re-insurers will take on only risks that give them a reasonable expectation of a return on investment. In the United States, the private market represents only 15 percent of insured flood risks as of 2017.

To provide affordable insurance, the NFIP offers subsidized rates to coastal and inland properties in Special Flood Hazard Areas. These rates don't generate enough money to pay the losses covered by the NFIP.

According to CoreLogic, about a quarter of residential and commercial properties in the country are at high or moderate risk of flooding, but are outside designated high-risk areas. Only 28 percent of the owners of properties in high-risk areas purchase flood insurance.

What about the goal of floodplain management?

NFIP started its mission 50 years ago, before an explosion of development erupted in what is called the 100-year floodplain. Today, 41 million people (about 13 percent of the U.S. population) live in areas of potential inundation.

The floodplains contain more than $5 trillion in assets. When officials try to assess communities' risk, they must consider development, infrastructure and populations. But that data change often, so the risk assessment is often flawed when the data do not reflect current and expected conditions.

As for goal three, the program developed maps of flood-hazard zones, but they are often out of date. For example, about two-thirds of the flooding caused by Hurricane Harvey occurred outside of the program's Flood Hazard Areas.

The NFIP is broken. In 2016, the Government Accountability Office made recommendations to fix its deficiencies. Those were the same recommendations it made in 2008 and again in 2013.

They were never addressed because they were so expensive. Consistently, reports suggest three fixes to the program:

• Require that properties subject to inundation buy flood insurance.

• Modify premiums in the higher risk communities to reflect the actuarial cost of the risk.

• Limit the amount of insurance available to properties that previously flooded or create policies that restricts rebuilding in high-risk areas.

Congress can't agree on how to reform flood insurance. Reform bills are often derailed by special interest groups, such as developers, real estate agents and even well-intentioned consumer advocates. Lawmakers also face opposition from constituents who want to avoid higher premiums.

In 2012, the bipartisan Biggert-Waters Flood Insurance Reform Act sought to phase out rate subsidies and impose actuarially sound premiums. As a result, artificially suppressed rates started increasing. Two years later, Congress reinstated the rate subsidies because some property owners were facing premium increases of 800 percent in some cases.

Fixing rate subsidies alone cannot fix the problem. We need to consider the possibility that our approach to flood insurance is flawed.

How far should we go to accommodate those choosing to build or live in high-risk areas?

How do we continue to offer insurance at subsidized rates, and for how long — and to whom?

How do we increase the pool of "at risk" property owners? How do we require the purchase of flood insurance for property owners who are unaware that their property is at risk because of the flawed NFIP maps?

Solving these issues will require great political will and a strategic approach. It will require government to incorporate resiliency in infrastructure decisions, provide risk financing alternatives for property owners who need help with mitigation, and pass laws that discourage property owners from building in risky areas.

It will take substantial engagement of all stakeholders to push for changes in public policy that recognize and address the inevitability of flooding.

Anita Byer is president of property and casualty brokerage firm Setnor Byer Insurance & Risk in Plantation, Florida.