Senate Banking Committee Issues Testimony From Environmental Defense Fund Associate VP
* * *
Good morning. I would like to thank Chairman Brown, Ranking Member Scott, and the esteemed members of the committee for the invitation to speak to you today. I would also like to thank this committee for its support and attention to the National Flood Insurance Program (NFIP) and their focus on increasing the resilience of our communities. I am pleased to have the opportunity to testify today and share my perspectives on policy priorities for the program.
I am the Associate Vice President for Economics and Policy at the
I have been researching the NFIP for over fifteen years. This has included studies on the mandatory purchase requirement, drivers of demand, design of increased cost of compliance coverage, adverse selection in the program, pricing, and the private flood insurance market. I am also the author of the book
The Important Role of
Severe floods, like other natural disasters, impose enormous and wide-ranging costs on households. These include repairing property damage to homes, possessions, and vehicles, as well as the cost of emergency and preparedness supplies, evacuation expenses, temporary living expenses if people have to leave their homes, higher food expenses if families need to eat out more, potential health impacts or additional care for vulnerable family members, and the costs of cleaning up debris generated from the disaster. If power is lost, people may need to purchase generators and fuel; if the transportation network is down, they may incur higher commuting costs; and if businesses are impacted, they may lose income at the same time they face an increase in expenditures.
How do households cover these disaster-related costs? Most households have insufficient liquid savings to cover expenses outright. This is more severe for people with lower incomes and people of color; research has shown these populations have lower levels of emergency savings, due to systemic inequalities and limited access to resources.1 Disaster loans are often a first-line of defense provided to those impacted by disaster, but for lower-income households, additional debt is more likely to make their financial situation more precarious and limited repayment ability will mean many lower-income households will be completely locked out of access to credit altogether. Federal disaster aid is too limited or too delayed or creates unnecessary burdens for households.2
With limited other options, insurance plays a critical role in getting households financial resources they need to rebuild their homes and replace damaged possessions. This is why insurance is a necessary component of securing financial resilience to disasters. In ongoing research, for example, a colleague and I find that after a hurricane, households with insurance are less likely to report high financial burdens both three months and a year after the disaster and are less likely to report having unmet funding needs.3 In the same paper, we find that widespread take-up of flood insurance improves local economic recovery by increasing visitations to local commercial establishments. This echoes other research by colleagues, which have similar findings that insurance improves recovery4 and that lack of flood insurance can widen inequality post-disaster.5
For over fifty years, the National Flood Insurance Program has been providing this necessary coverage for millions of households and businesses around the country. That said, we still face the challenge that many at-risk households are uninsured against flooding.
* * *
1 Ratcliffe, C.,
2 May, R. (2020). "Accessing Disaster Recovery Assistance Requires a Map and a Compass." Wharton Risk Management and Decision Processes Center,
3 You, X. and Kousky, C. (2023). "Improving Household and Community Disaster Recovery: Evidence on the Role of Insurance." EDF Economics Discussion Paper 23-01. Available at SSRN: https://ssrn.com/abstract=4365715 or http://dx.doi.org/10.2139/ssrn.4365715
4 For example: Turnham, J.,
5 Rhodes, A. and
6
* * *
Those least able to afford insurance have greater need of financial protection since they have little access to other sources of recovery dollars. Without the resources to recover and obtain safe housing again, households must often cover recovery expenses in ways that have negative long-term impacts or limit their ability to build wealth, such as deferring medical expenses, falling behind on bills, or draining retirement savings. Research finds that after suffering flood or disaster damage, credit score declines, mortgage delinquencies, and bankruptcies are more likely for households that are financially constrained as well as those who live in a community of color.8 The need for more inclusive insurance is an important policy topic for other disaster and property insurance beyond flooding, as well.9
The Need to
Insurance and risk reduction need to be viewed as complements. When the underlying risk is lowered, insurance becomes more affordable. Over its long history,
The NFIP minimum floodplain regulations provide communities baseline requirements to support less risky development, but updates to these requirements are now needed to reflect modern best practices and the realities of changing conditions. Grants to mitigate impacts to individual properties have reduced damages in many communities. And the Community Rating System, a program designed to reward communities that take actions to better manage flood risk, has led to lower flood claims and lower overall losses in participating communities,10 although some improvements could make it more widely accessible and help communities focus on the most impactful interventions.
* * *
7 Kousky, C. (2018). "Financing Flood Losses: A Discussion of the National Flood Insurance Program" Risk Management and Insurance Review. 21(1): 11-32.
8 Ratcliffe, C.,
9 Kousky, C. and
10 Gourevitch, J.D. and
* * *
Beyond the NFIP, at this moment, there are more federal dollars for reducing the losses from extreme climate events than have ever been previously available. This includes
With such funds available, attention now needs to turn to helping communities access these funds, along with providing support for developing cost-effective, impactful, and equitable resilience projects. This is especially true for communities with fewer resources to navigate the sometimes challenging process of securing federal grant funds.
While this new funding is substantial, it is still far below demand. For instance, in 2022,
Several mitigation options for properties are quite expensive and policyholders simply do not have the necessary funds for such changes. When a property is damaged by a flood, it should be seen as an opportunity to build back in a way that lowers future damages. To support this, the NFIP could make greater funding available at the time of rebuilding to pay for investments in risk reduction and couple this, perhaps in partnership with local organizations, with actionoriented advice for policyholders.
Currently, NFIP policies have Increased Cost of Compliance (ICC) coverage, which provides up to
* * *
11 For more on this program see the testimony of
* * *
Second, the NFIP continues to have a group of highly risky properties that have seen repeated flooding--aptly named repetitive loss properties. They make up only a small share of policies, but a larger, and disproportionate, share of claims. From 1978 to 2015, just 160,000 repetitive loss properties (about 3% of all policies) received
Since the costs of continued occupancy are greater than the costs of relocation for these properties, they are often targeted for buyouts through certain mitigation grant programs.
These programs provide federal grant dollars for state and local governments to purchase risky properties and return them to open space in perpetuity. Unfortunately, these programs are too often missing important opportunities and wasting financial resources. Federal buyout dollars can take too long to reach homeowners ready to move after a damaging flood.15 Households-- especially those of limited means--cannot wait for years for the buyout process to be undertaken. Floodplain managers have observed that at times, households may begin the rebuilding process to make their home safe for habitation, often using partial or full flood insurance payouts, since they need a safe place to live immediately, only to have the home demolished later in a buyout.
* * *
12 Residential policies can only be insured up to
13 Kousky, C. and
14 See: NFIP (2017). Developing a Repetitive Loss Area Analysis for Credit under Activity 510 (Floodplain Management Planning) of the Community Rating System, online at: https://crsresources.org/files/500/rlaa-guide2017.pdf.
* * *
A critical reform would make some federal buyout dollars available immediately after a flood or allow for local reimbursement of floodplain buyouts for repetitive loss properties. But the federal delay is only one contributing factor to the often long timeframes for buyouts. Another source of delay comes from the administrative tasks required for local implementation of buyouts. These can be reduced through pre-disaster evaluation and prioritization of where buyouts will occur, which properties are eligible, and conducting the necessary appraisals and approvals. To encourage local communities with high-risk areas to complete this necessary pre-disaster work, the expedited or reimbursed federal buyout funds could be tied to demonstration of a pre-disaster buyout planning process, perhaps piloted in repetitive loss areas. In addition, support could be made available for restoration of these properties to provide environmental benefits, including natural flood protection.
While reforms such as these are needed across all communities, the committee should also consider greater efforts, building on
Finally, the program could provide greater incentives and information to support investments in low-cost mitigation options, since many homeowners simply do not have the funds to pay for high-cost mitigation, such as elevation, or the desire, funds, or ability to relocate. This includes actions such as improving grading around the home; using flood-resistant materials in basements or lower floors; elevating mechanicals, utilities, and appliances; reducing impervious surfaces around the home; installing flood vents or sump pumps; and sealing foundation and basement walls.16 According to
* * *
15 Wiley, H. J. P. and
16 For more information, see: chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.fema.gov/sites/default/files/documents/fema_prote ct-your-home-from-flooding-brochure_2020.pdf.
* * *
Improving the Fiscal Soundness of the Program
Insurance is predicated on the idea of risk pooling. When independent losses are grouped together, the aggregate loss is stable and well-predicted. Natural disasters, however, present a challenge. Losses from disasters are correlated--entire communities are hit simultaneously-- and events themselves can be very severe. This possibility for extreme losses creates annual losses that are very spiky and can fluctuate wildly from one year to the next. To stay solvent, insurers must have access to enormous sums of capital to cover high loss years.
The NFIP was originally designed to borrow from the
Debt is not a typical part of private insurance operations. Insurance companies collect most of their revenue in advance, before having to pay claims and expenses. While the NFIP is a publicsector program, and thus financed quite differently, this large debt is unsustainable.
All observers, including FEMA,19 the GAO,20 and others, have stressed that the NFIP will never be able to repay this debt. The program was simply never designed to be able to handle the catastrophic loss years it has faced. And the percentage of NFIP revenue that is consumed by debt services could increase from higher interest rates. There is not a path forward to repay this debt based on premiums without imposing untenable financial burdens on policyholders and undermining the ability of the program to pay claims. As such, all analysts of the program believe this debt must be forgiven. As
* * *
17 https://www.fema.gov/case-study/rising-interest-expenses
18 Udvardy, S. (2021). Three Reasons the House Reconciliation Bill is Good News for Flood Resilience and Communities. The
19 https://www.fema.gov/case-study/rising-interest-expenses
20 GAO (2017). Comprehensive Reform Could Improve Solvency and Enhance Resilience.
* * *
Forgiving the debt would allow the program to begin fresh with a new approach to fiscal soundness.
Risk Rating 2.0, however, did not include any type of means-tested assistance program, which is needed, but would require congressional authorization. Disaster insurance, including flood insurance, when risk-based, can be very expensive.22 Even with the NFIP only managing to a one-in-twenty year event, far lower than a private sector firm, prices in areas at high risk of flooding are going to be expensive, reflecting that risk. At the launch of Risk Rating 2.0,
* * *
21 GAO (2008).
22 Kousky, C. (2022). Understanding Disaster Insurance: New Tools for a More Resilient Future.
23 https://www.fema.gov/flood-insurance/risk-rating
* * *
As has been noted by FEMA,24 the
There has been substantial investigation into how to design such a program from the aforementioned groups. It is time to use that combined research to adopt and implement such a program. It should be supported, not by cross-subsidies within the program, but through taxpayer dollars. This is an important safety net, akin to other federal safety net programs for those most in need. In addition, the affordability program should be scaled, so that the amount of support phases out as income increases. And it should be available to anyone--current or future policyholder--who wishes to purchase flood insurance.
Private vs
As everyone on this committee knows, the NFIP was established over fifty years ago in response to a lack of available flood coverage in the private sector. Floods are not the only peril for which the public sector has had to step in with support. Every state exposed to hurricanes has a socalled wind pool or beach plan for those who cannot find or afford wind coverage in the private market.
insurance policies. Federally, we have the Terrorism Risk and Insurance Program to backstop commercial terrorism coverage.
These programs were typically put into place when a severe event made clear that there was insufficient availability or affordability from the private sector. The fact that losses can be so severe, and impact so many people simultaneously, means that some of the underlying principles of risk pooling, on which insurance is based, fail to hold for catastrophic risks. This makes disaster insurance fundamentally more expensive than non-disaster insurance. At times, there may not be any price at which insurance companies can profitably offer disaster coverage that consumers are able or willing to pay. These breakdowns in insurance markets, often witnessed after disasters, have led to the creation of many of the public sector programs just mentioned. This is also true internationally, where there is even greater variation in how such programs are designed.
* * *
24
25
26
27 Kousky, C. and
* * *
In the case of flooding, these difficult insurance dynamics for the private market, coupled with lack of information and understanding of flood risk on the part of both consumers and insurers, as well as ongoing concerns about adverse selection, led the NFIP to be the dominant source of flood insurance in the
While private flood policies can provide consumers with more options, which could include better prices or more expansive coverage, it is unlikely the private sector will ever be able to provide flood insurance for a large share of those at risk. This is due to the difficulty just discussed with insuring catastrophic risks at a price point people can afford to pay. This will only be exacerbated as climate change and continued development increase flood risk in many places around the country. This could make private flood insurance simply unaffordable to many households at risk. And since flood losses can be catastrophic and threaten insurer solvency, many insurers simply do not want to take the risk onto their books at any feasible price point. Indeed, we are seeing private insurers pull back from all climate perils that are now increasing, such as insurers in
That said, all of the various public disaster insurance programs--here and around the world-- struggle with the basic question of who should pay for disaster losses. Some other countries take a "solidarity" approach to pricing disaster insurance, charging one flat fee to all residents (perhaps varying by property type or coverage limit). They make disaster insurance universal and compulsory.
* * *
28 Data online at: https://tableau.naic.org/views/PFloodDataCall_16057353537510/PurposeandExplanation?%3Aembed=y&%3AisG uestRedirectFromVizportal=y
* * *
Addressing Climate Change
Flooding is the costliest natural disaster, and the risk is escalating in many places due to the combined effects of climate change, development, and land use decisions. Sea level rise has already led to an increased probability of coastal flooding, which will continue, and is projected to cause higher flood damages in the coming years.29 Climate-induced intensification of rainfall is also projected to increase flooding in certain parts of
Our land use and development decisions have also, at times, increased flood risk. Decisions such as reducing impervious surface area, eliminating natural systems, such as wetlands, that can store floodwaters, continuing to build in areas known to be at high flood-risk, and failing to build in a way that is mindful of escalating risk, all worsen flooding.
* * *
29 Sweet, W. V. and
30 Wobus, C.,
* * *
As climate change continues to intensify flood risk around the country, the costs of insurance will necessarily need to increase as well, absent subsidies to cover the growing risk. When many policyholders still are not paying rates adequate to today's risk--and many unable to afford the rates required for today's risk--this will create a growing challenge for the program.
As noted earlier, the best way to address growing risk is to reduce it--not simply transfer it.
This requires changing our land use and building practices in areas of increasing flood risk. As discussed previously,
We have the tools and data now to provide graduated risk information at a property level across the country for today's risk, as well as the risk in the future under different climate scenarios. Before a community permits development or a family decides where to live, they should have an understanding of how the frequency of flooding might change, of the magnitude of those floods and their financial implications, and of the full cost of insurance today, including how it may change in the future. Right now, none of that information is easily available, creating information failures that can lead to poor decisions and information distortions in housing and mortgage markets.
Of course, there is concern that for current homeowners in very risky areas, this important information transparency could cause economic harm by lowering the value of their home.
Instead of sacrificing transparency about risks, we need to make it easier for current occupants of very high-risk properties to either mitigate their risk to preserve property values or to accept a floodplain buyout and maintain their financial position as risks escalate. This is true across income levels, but financially- and climate-vulnerable communities will need additional help.
Conclusion
Flood insurance has a critical role to play in promoting resilience by protecting households and businesses against negative financial shocks, speeding disaster recovery, and lowering risks before a disaster through financial incentives and after a disaster through greater resources for resilient rebuilding. All households need access to these benefits of insurance. This can be guaranteed by adoption of a means-tested assistance program to help lower-income households with the cost of flood insurance. In addition, as flood risk grows in the coming years, risk reduction is going to become more important as a key complement to insurance.
* * *
Original text here: https://www.banking.senate.gov/download/kousky-testimony-5-2-23
Senate Banking Committee Issues Testimony From Headwaters Economics Executive Director Hernandez
Senate Banking Committee Issues Testimony From Insurance Institute for Business & Home Safety President Wright
Advisor News
- Bill that could expand access to annuities headed to the House
- Private equity, crypto and the risks retirees can’t ignore
- Will Trump accounts lead to a financial boon? Experts differ on impact
- Helping clients up the impact of their charitable giving with a DAF
- 3 tax planning strategies under One Big Beautiful Bill
More Advisor NewsAnnuity News
- An Application for the Trademark “EMPOWER INVESTMENTS” Has Been Filed by Great-West Life & Annuity Insurance Company: Great-West Life & Annuity Insurance Company
- Bill that could expand access to annuities headed to the House
- LTC annuities and minimizing opportunity cost
- Venerable Announces Head of Flow Reinsurance
- 3 tax planning strategies under One Big Beautiful Bill
More Annuity NewsHealth/Employee Benefits News
Life Insurance News
- On the Move: Dec. 4, 2025
- Judge approves PHL Variable plan; could reduce benefits by up to $4.1B
- Seritage Growth Properties Makes $20 Million Loan Prepayment
- AM Best Revises Outlooks to Negative for Kansas City Life Insurance Company; Downgrades Credit Ratings of Grange Life Insurance Company; Revises Issuer Credit Rating Outlook to Negative for Old American Insurance Company
- AM Best Affirms Credit Ratings of Bao Minh Insurance Corporation
More Life Insurance News