How much should flood insurance cost?

Ever since the National Flood Insurance Program was created in 1968, the federal program has struggled to find the sweet spot of how much to charge for the coverage.

If premiums are too low, the taxpayers, including those who don't live in flood-prone areas, make up the difference when a hurricane or other major natural disaster hits and the cost of claims exceeds what NFIP has in reserve.

If premiums are too high, homeowners and businesses that should buy the coverage don't, again hitting up taxpayers to come to the rescue when a disaster strikes. Plus, as with all kinds of insurance, when those who need insurance can't afford it, those who can afford the coverage end up paying more in premiums than they otherwise would have.

Mississippi's two senators, Roger Wicker and Cindy Hyde-Smith, contend that NFIP presently is out of balance on the high side.

Over the past eight months, they along with six other Republican senators from flood- or hurricane-prone states have written two letters of complaint to the top administrator of the Federal Emergency Management Agency, under whose auspices NFIP falls.

The senators claim that the rating system that FEMA established in 2021, during the administration of Democrat Joe Biden, is backfiring. Although the rating system is designed to set premiums closer to the amount of flood exposure a property has, the resulting rise in annual premiums has been so steep that droves of homeowners are either dropping the coverage or not buying it in the first place.

"This loss of participation is a structural problem for the NFIP," the senators write. "Flood insurance depends on a broad risk pool to function effectively. As policyholders exit the program, risk becomes more concentrated, premiums face additional upward pressure, and volatility increases. At the same time, uninsured homeowners are more likely to rely on post-disaster federal assistance, shifting costs away from a pre-disaster insurance model and onto taxpayers."

In a nutshell, according to the senators, a plan that was designed to make NFIP more financially sound is doing just the opposite -- not to mention almost certainly producing an earful of complaints to these senators from their constituents.

To stop what they call an "actuarial death spiral," the senators ask FEMA to hold any future rate increases to the statutory minimum and work with Congress on creating a new rating structure.

What the senators are asking sounds reasonable, but it might be impossible to find the "right" rate structure as long as people are building and rebuilding in areas that are prone to flooding. NFIP got into an actuarial bind because its rates were nowhere high enough to cover the catastrophic losses caused by hurricanes, such as Katrina, which decimated the Gulf Coast in 2005. From that disaster through four other major hurricanes over the next dozen years, NFIP was drowned with more than $31 billion in claims.

The best way to reduce such risk is by reducing the amount of development in flood-prone areas and by making sure what is developed is elevated above historical high-water marks. There have been some governmental efforts to do this through stricter building codes and by acquiring and leaving barren areas that perpetually flood, but too often those efforts aren't sustained either because of political pushback or budgetary limitations.

Thus, unless our nation expects those who live inland to subsize those who live near oceans or in floodplains, the rates for flood insurance should be commensurate with the property owners' likelihood of having a sizable claim. If the insurance is priced correctly, and if the premium makes that location unaffordable, it might be time to consider a move.