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A New Reality for Federal Flood Insurance

Lori Pottinger April 16, 2019
Photo of a mobile home flooded in Sebastopol

Flood damages have been rising around the country―most recently in the Midwest. The National Flood Insurance Program provides coverage to more than 5 million households and small businesses across the United States, including more than 229,000 in California. The program has been hard hit by payouts from major flood disasters in recent years and is heavily in debt. The Federal Emergency Management Agency (FEMA), which houses the program, has recently announced significant changes. We talked to Carolyn Kousky, a flood insurance expert at the Wharton Risk Center at the University of Pennsylvania and a member of the PPIC Water Policy Center’s research network, about the program.

PPIC: How is the national flood insurance program changing?

CAROLYN KOUSKY: FEMA is modernizing how it prices flood insurance policies, drawing on best practices in risk modeling. The changes are scheduled to roll out in October 2020. One big change is that new rates will be property-specific and based on factors like how close a property is to a river or its elevation. Higher-risk properties will have higher rates. Previously, everyone in a high-risk zone paid the same rates, regardless of the level of actual risk. This change should be easier to understand for residents, which is an important improvement. Economists have been calling for such an approach for a long time.

These changes will also mean that rates vary more smoothly across a community. FEMA flood maps designate so-called “100-year” floodplains. In the old system, if your house was just outside that line your rates dropped dramatically—it was like a cliff between rates. Neighbors might have differences of $1,000 or more, but of course the risk between neighboring houses was almost never that big. This new system should eliminate that cliff.

The new pricing won’t help low-income families afford insurance, so there will still be a need for an affordability program. But the new pricing will eliminate another inequity. The previous rates didn’t always take into account the value of the structure being insured. That meant that higher-value structures were paying less than they should, and lower-value ones were paying too much. So to the extent that the value of a house reflects income, poorer households were being penalized. This problem is now being fixed.

PPIC: The federal government has acknowledged that most of its flood maps don’t reflect rising risk, and now some communities have created stricter standards to help them prepare for floods in a changing climate. Will this new approach help the program prepare for climate change?

CK: In some ways, yes. One important thing the new pricing does is add flood risk from rainfall. Previously the program’s pricing largely only reflected risks from coastal storm surge and rivers overflowing their banks. Rainfall risk is increasing with climate change, so this is a very positive change in the program. We saw the damage that rainfall flooding can produce in an extreme way with Hurricane Harvey.

These annual insurance policies only price for next year’s risk―and this is how it should be. It wouldn’t make sense for property owners to have to pay today for risks 50 years down the road. So the rating changes are not about managing climate changes. But we do need to think about increasing climate risk when planning new development and infrastructure and making other longer-term investments.

PPIC: Do you think these changes will make the program fiscally sustainable for the long term?

CK: As I understand it, these changes are about making sure the prices better reflect current risks. Based on what FEMA has released so far, there’s no way to know how it will affect the program’s revenue.

This new pricing is definitely fairer and more reflective of risk. If Congress coupled that with forgiving the program’s existing debt—which is still in the tens of billions―the program could use this as a re-set on its fiscal sustainability. There is a bill in the House right now that would do this. But thinking about the long-term fiscal soundness of the program in the face of new urban development and a changing climate would likely require more than just rating changes.

That said, there are so many benefits to making these changes in the insurance program. It’s a great first step to modernizing the system.

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