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Uncovered: The Raising of Flood Insurance

Using the wrong word at the right time (or is it right word at the wrong time?) can be such nuisance, peril even. I could, for example, ask that you ensure I insure my property. Or is it insure to ensure?

Whichever prevails, it will soon cost you much more to safeguard your property through the National Flood Insurance Program, which, by its own acclaim, is charged with “protecting people in the United States against the perils of flood.”

Yet, but for a stay-of-execution, Americans would have already started reeling from hefty premium hikes. Consumers reliant on NFIP protection can, however, breathe a sigh—but only a brief sigh as come October, it will again be time to see if there was indeed a syncing of the minds between congressional vision to protect constituents and program mission to safeguard said.

With Congress nudging, the Federal Emergency Management Agency, administrator of the NFIP, shelved Risk Rating 2.0, its proposed overhaul of flood insurance coverage. Among other things, Risk Rating 2.0 calls for switching to risk-based pricing, resulting in a waning of subsidies “most coastal communities enjoy on their flood insurance premiums and show the true dollar cost of living in areas repeatedly pounded by hurricanes and drenched with floods — like South Florida,” according to the Miami Herald.

Or as Wayne Pathman, a Miami-based land use attorney and chair of the city’s Sea Level Rise Committee put it, “That means insurance is about to become very expensive, and it kind of sounds the bell that these are high-risk areas.”

Hysterics notwithstanding, Americans will soon be forced to pay a whole lot more to ensure peace of mind. Well, as much peace of mind can be ensured by insuring one’s earthly possessions against, let’s say, flood. And the NFIP will continue helping property owners get that piece of peace, at a premium. Just as it wants to get its own peace—balanced books.

But paradoxically, the NFIP has found itself in a rather perilous place: the protector “against the perils of flood” is drowning in debt—and right now, Americans will have to play lifejacket to the flailing program.

Call it failure to truly appreciate climate change, its impact, its tentacles or its velocity. Call it abdication of fiduciary duties as apparently the NFIP and its governance failed to fully grasp the local reach of global warming—in this lifetime. Call it a debacle that the very program to ‘protect’ property owners is itself in dire need of rescue.

Critics cite a couple of reasons for the NFIP woes, perhaps the most important of which is that the program deviates from regular insurers in assessing risk. For example, rather than analyze a property for specific risks, NFIP currently bases premiums on average historical losses, using often incorrect and outmoded flood maps.

“One way the program can make its way out of the red is by charging homeowners the real cost it takes to insure their properties from flood risk. That means getting rid of subsidies and—inevitably—raising some premiums,” according to the Herald.

Indeed, NFIP counts proposed premium hikes among the remedy to its current calamity. But critics fear the proposal is vague; heavy even on the backs of consumers, many already struggling to keep afloat the American Dream. It’s not hard to imagine the resulting nightmare when finally, rates rise and resilience falls.

According to Ernst Rauch, chief climatologist for Germany-based reinsurance company Munich Re, “affordability is so critical [because] some people on low and average incomes in some regions will no longer be able to buy insurance.”

Just as there are three certainties—life, taxes, death—a fourth is worth honorable mention: no insurance, no coverage; figurative and literal. Naturally, homeowners without the pesky burdens of mortgages will have more latitude in choosing to insure or not to insure. For everyone else, choice is less disjunctive.

And, there is fallacy in thinking the solution lies with avoiding coastal areas and flood zones. According to Insurance Information Institute, 20 percent of flood claims come from low to moderate flood-risk areas. Since flood insurance is not mandated outside FEMA’s designated risk zones, recovery from water intrusion can be quite the costly out of pocket expense.

As devastating as Hurricane Harvey was, turns out it was perhaps also barometer of sorts, highlighting the flaws of FEMA’s outmoded system used to determine flood risk. The category four storm that caused $125 billion in damage, according to the National Hurricane Center, nearly entombed Houston in feet of flood water. Yet, of the 204,000 homes damaged, three quarters were outside of the 100-year flood plain, making flood insurance an option many did not exercise.

Despite lessons from Harvey and Houston, nationwide a growing number of properties—even those within designated high-risk zones—are without flood insurance coverage. And sadly, though Florida has more square miles of coastline than any other state in the union, it is perhaps among the most vulnerable with three times as many properties at risk as any other state. Yet, only 42 percent of vulnerable homes have flood insurance, according to the Associated Press.

Perhaps furthering widening the insurance divide, premiums through NFIP have already been on the rise. On average, property owners have seen an eight percent increase in premiums, paying around $1,062 annually, inclusive of surcharges.

Single digit increases might soon look appealing. According to a Miami Herald reporting, “The bottom line: your flood insurance premium is going up again—and under a policy change the Federal Emergency Management Agency is considering, it could skyrocket even more in coming years.”

The last time Congress passed a full five-year reauthorization in 2012, it was accompanied by rising flood insurance premiums. “In one extreme case, the premium on a $300,000 house in Monroe County went from $1,900 a year to more than $49,000,” according to the Herald. Such was the outcry from coastal communities that lawmakers backpedaled, calling for a ceiling that caps premium increases at 18 percent annually for residential properties and 25 percent for commercial properties.

Yet ceiling caps is but one element in ensuring peace of mind. Climate change is another.

“Climate change has changed the equation, making the past no longer indicative of the future,” said insurance and climate change scholar Jason Thistlethwaite, an assistant professor at the University of Waterloo, in a PBS News Hour reporting.

And as Ronald Kammer of the insurance law firm Hinshaw & Culbertson told the Herald, “At some point if sea level rise comes to the point where flooding in a particular area becomes expected or fairly commonplace one of two things will happen. One, the cost of insurance will become very expensive and that may have an impact on future development. Two, you could have a situation where certain insurers no longer have the risk appetite to continue insuring an area that is prone to systemic flooding.”

Thistlethwaite further cautioned, “if you are using historical models…, you are driving down the road by looking in the rearview mirror.”

As economists have argued against regulating rate increases for fear insurance premiums be kept ‘artificially low,’ lawmakers have the quite the quandary: ensure constituent protection and program success—including solvency.

“If, because of public pressure, policymakers reject rate increases that are justified by insurance models, that puts insurance companies at a greater risk of losing money. In some cases, national insurance companies have left states altogether when providing insurance there was not profitable enough.”[1]

As reported in the Guardian, “It is very interesting if insurers conclude that climate change was a significant contributory factor to the event and will make the insurance companies think carefully about the pricing and availability of similar insurance policies,” said Paul Fisher, the Bank of England’s former coordinator on climate change, and a fellow at the Cambridge Institute for Sustainability Leadership.

Well, insurers are concluding that climate change is “a significant contributory factor.” The world’s largest reinsurance firm pointed the finger at global warming, blaming it for the $24 billion in losses resulting from wildfires in California. Yet losses are not limited to wildfires, as, according to the National Oceanic and Atmospheric Administration, a total of 219 weather and climate events cost $1.5 trillion from 1980 to 2017.

And in just one year, 2018, 14 different natural disasters, ranging from hurricanes to wildfires to winter storms cost taxpayers $91 billion according to NOAA.

“If the risk from wildfires, flooding, storms, or hail is increasing, then the only sustainable option we have is to adjust our risk prices accordingly. In the long run, it might become a social issue,” Rauch warned.

But as Floridians, we need not look to California for consequences of catastrophes. Many homeowners—right here in the Sunshine State—had no choice but to hook up with state-backed insurance as the private guys pulled out following Hurricane Andrew. Luckily, officials were less flighty than private insurers. Rather than flee, they instituted some of the most stringent building codes that became the benchmark for building, in South Florida and the rest of the state, as well as in other hurricane-prone areas.

Building codes and all, even with just 42 percent of vulnerable homes being covered, Florida has more flood insurance policies than any other state. And according to the Insurance Journal, the vast majority of those policies are through the NFIP; in 2017 only eight percent were from private companies.

But, according to the Herald, “if competition within the private market isn’t able to keep premium prices affordable, vulnerable South Florida could face economic chaos, especially in the face of rising seas. The region faces one to two feet of sea rise by 2060, according to the Southeast Florida Regional Climate Compact, and has billions of real estate at risk, development spurred in part by insurance that doesn’t show the whole picture in terms of risk.”

Nonetheless, where private insurance is unattainable, many property owners are finding they must get in bed with the NFIP. Indeed, as more Americans find themselves increasingly unattractive to private insurers, the more NFIP membership swells, the more the NFIP has to borrow to satisfy its customers. In fact, the NFIP finds itself owing the U.S. Treasury $25 billion for loans to pay out claims.

The cycle of borrowing to pay out is at best flawed. In fact, according to the US General Accounting Office, “comprehensive reform will be essential to help balance competing programmatic goals, such as keeping flood insurance affordable while keeping the program fiscally solvent.”

As current NFIP premiums do not reflect the full risk of loss, the program creates increased federal fiscal exposure and “obscures that exposure from Congress and taxpayers, contributes to policyholder misperception of flood risk (they may not fully understand the risk of flooding), and discourages private insurers from selling flood insurance (they cannot compete on rates),” according to the GAO.

Consumers seem caught in the quagmire as program administrators and lawmakers grapple with ‘the best possible outcome.’ This, all while FEMA and its offspring NFIP wrestle with reconciling the impossible: make flood insurance affordable AND remain solvent.

“This is something that must concern just about every property owner,” said Jerome Soimaud, founder of “No longer is it just an issue for those who live in FEMA-designated flood zones, as even those are about to change,” he said.

Again, FEMA is trying to rectify, proposing an overhaul of its rating system and risk determination. Dubbed Risk Rating 2.0, the new methodology would mean, among other things, abandoning the existing flood zone maps as well as increased premiums to better reflect actual risk.

But lawmakers aren’t so happy with FEMA’s proposal. In fact, all but one Florida congressional members registered their dissatisfaction in a letter to the Speaker of the House.

“While FEMA intends Risk Rating 2.0 to provide more accurate and transparent flood insurance pricing, this untested proposal could lead to increased premiums, forcing homeowners to drop coverage, or even worse, lose their home,” they wrote.

There could be a lapse if lawmakers and program administrators can’t find accord, and another lapse could prevent insurers from writing new policies. And according to the Herald, “since banks demand flood insurance policies on homes with mortgages, this could slow down home sales.”

So, where’s the lifeboat, you know, the silver lining?

It might be good to start at the intersection of transparency and common sense; of political pandering and economic viability; of protection and proactivity. The GAO for example, has recommended that affordability assistance be funded with a federal appropriation, in lieu of current discounted premiums.

Additionally, the GAO joins a growing chorus preaching the virtues of mitigation as a cornerstone of the federal government’s affordability assistance efforts. Helping to pay for mitigation, including elevating buildings, will, in the long run, reduce premium rates because mitigating permanently reduces flood risk. As mitigation efforts can have high up-front costs, it has been suggested that federal loans could be used to spread consumer costs over time.

In its final recommendation, the GAO proffers:

“As Congress considers reauthorizing NFIP, it should consider comprehensive reform to improve the program's solvency and enhance the nation's resilience to flood risk, which could include actions in six areas: (1) addressing the current debt, (2) removing existing legislative barriers to FEMA's revising premium rates to reflect the full risk of loss, (3) addressing affordability, (4) increasing consumer participation, (5) removing barriers to private-sector involvement, and (6) protecting NFIP flood resilience efforts.”

And as Dr. Ben Caldecott, director of Oxford University’s sustainable finance program said in a Guardian reporting, “company directors and fiduciaries will ultimately be held responsible for avoidable climate-related damages and losses and urgently need to up their game to avoid litigation and liability.”

Yet, when it comes to safeguarding against the perils of flood, an ounce of prevention is better than a pound of cure, as the cliché goes. Inasmuch as we can, let’s ensure we do all we can to keep floodwaters at bay (pun intended). After all, peace of mind may best be fortified by mitigation—not litigation.

Let’s commit to a triumphant return to common sense where we mitigate before we litigate as mitigation equals prevention. Litigation is at best, an attempt at remedy.

[1] PBS NEWS HOUR: “How Climate Is Changing Your Insurance,” November 27, 2018.

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