Subsidizing flood insurance

Hurricane Helene likely caused more than $30 billion worth of damage. Less than two weeks later, Hurricane Milton inflicted almost $50 billion more. With five weeks left in this hurricane season, the Small Business Administration's disaster loan program is already out of money. And more tropical storms are swirling over the Atlantic. Who pays for all of this?

Because private home insurers generally find this sector of the business unprofitable, the federal National Flood Insurance Program shoulders the burden of providing homeowners inundation coverage — and it has problems. The NFIP is managed by the Federal Emergency Management Agency — the same body fighting misinformation and dodging vigilantes as it tries to distribute much-needed aid to the victims of Helene and Milton. The program provides nearly $1.3 trillion in coverage to more than 5 million policyholders. It's funded by the premiums collected from policyholders but borrows from the U.S. treasury when claims it's obligated to pay outpace revenue, as is often the case. Congress canceled $16 billion in NFIP debt in 2017; since then, the program has borrowed billions more from taxpayers.

If Hurricanes Helene and Milton epitomized how destructive hurricanes are becoming in a warming world, the NFIP's financial woes will only worsen. And yet Congress has made no fundamental reforms to the program since its inception nearly six decades ago. That cannot continue.

Congress created the NFIP when private insurers retreated from the flood insurance market after the first storm to cause $1 billion in losses — Hurricane Betsy in 1965. The government stepped in with two conditions, which were intended to avoid "moral hazard," the phenomenon whereby insuring against a particular risk encourages more people to take it. It required communities to adopt land-use policies that discouraged development in flood-prone areas, and it mandated that homeowners pay "actuarially sound" premiums. Moral hazard took hold anyway, as developers and other real estate interests gamed the system to suppress premiums and permit building in low-lying areas and beachfronts exposed to storms.

The upshot is that FEMA flood hazard maps that determine coverage today rely on outdated information so inaccurate that more than 40% of NFIP claims made from 2017 to 2019 were for properties outside official flood hazard zones or in areas the agency had not mapped at all.

Heavily lobbied by the interested industries, Congress has taken little action to rectify these long-standing issues, which have been festering for decades. Since the end of fiscal 2017, it has enacted 31 short-term NFIP reauthorizations, including the most recent extension through Dec. 20. The one attempt at genuine reform in recent history — the Flood Insurance Reform Act of 2012 — would have ended subsidized rates for second homes and properties that repeatedly flooded. After Hurricane Sandy, however, coastal-state representatives reversed even these modest improvements.

Despite congressional inaction, FEMA took one step in the right direction on its own by implementing its Risk Rating 2.0 pricing methodology. The agency now uses data from private insurers to charge policyholders rates based on variables that more accurately gauge flood risk. But to be solvent and continue providing coverage to homeowners, the NFIP needs larger-scale reforms that require legislative action.

Ideally, modern data collection and risk mapping should enable private insurers to resume issuing flood insurance rather than leave the business entirely to the government. In the likely event that doesn't happen, Congress should at least reinstate the 2012 law's bans on subsidized premiums for second homes and properties that have been rebuilt multiple times. As climate change raises risks to more areas, investing in updated flood maps would also bring a more fitting geographic region under the NFIP's purview. That, in turn, would enable stronger enforcement of building standards and tougher flood-risk building requirements. And even if private industry didn't offer policies directly to consumers, more accurate pricing would help the NFIP appeal to private insurers, which might then share some of the risk by offering "reinsurance" — essentially, insurance protecting insurers, in this case NFIP, from high costs.

Still, premiums greatly lag behind risk assessments. Congress should enable FEMA to build on the Risk Rating 2.0 pricing model, adjusting rates to reflect actual risk. Yes, more accurate pricing might raise some homeowner's premiums. But this necessary step will help the program become fiscally stable and provide coverage in the coming years. It's simply unfair to ask the entire population to provide deep subsidies for properties that, by definition, only a portion of the population can occupy and enjoy.

An editorial from The Washington Post.