Paying for Flood Damage: The National Flood Insurance Program

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All of the examples from communities impacted by coastal flooding illustrate how people suffer economically and emotionally when their property is flooded. Underlying our considerations in this module are the hard economic facts of who pays and how do they pay?

The National Flood Insurance Program (NFIP), was established in 1968. It allows property owners to purchase insurance that is subsidized by the U.S. government and covers certain losses from flooding. The insurance premiums are not set by the insurance market risk valuation, as are other types of property insurance and, therefore, they are less expensive than the private insurance company rates would be. This is made possible by NFIP borrowing money from the Treasury or by subsidies from the federal government. As a result, all property owners with NFIP policies are receiving government subsidies to live in areas with high flood risk. Since the hurricane season of 2005 and subsequent years of catastrophic flooding events around the U.S., the NFIP is deeply in debt.

If you purchase property in a flood zone (see Lee County FL Government link below for examples), and you have a mortgage, you are required to purchase a flood insurance policy SEPARATELY from your homeowner’s policy (at the same time your homeowner’s policy, which is set by the private insurance market will typically be more expensive than for a property in a less flood prone area). The NFIP was created to protect property owners in flood-prone areas from disastrous losses in the event of flooding. NFIP, which is managed by the Federal Emergency Management Administration (FEMA) is federally subsidized and kept affordable by borrowing money from the Treasury in order to keep the program solvent. It is currently in “deep water” so to speak. In May, 2019, another re-authorization deadline requires Congress to act to find funds to cover the program. Since the 2005 Hurricane season, followed closely by Hurricane Sandy in 2012, and then the 2017 Hurricane season (and all the other flooding that has taken place in recent years), NFIP has become deeper in debt and in danger of lapsing coverage for property owners.

One of the debates that is taking place is how to provide affordable flood insurance to property owners, while at the same time ensuring future sustainability of the program. Part of this conversation, too, is the question of how to move forward as flood risks increase, as is the current trend. How do we make cities in flood prone areas more resilient to flooding and protect property without making the government or the property owners bankrupt? Our case studies demonstrated that many U.S. cities are facing an uncertain future. One solution is to increase the private market involvement in flood policy, which may drive up the cost to the property owner. As a property owner in an area prone to flooding, the author can attest that premiums are currently fairly affordable to most people. At the same time, this affordability tends to encourage development in flood-prone areas. Another lesson was learned and shared frequently following the 2017 floods in Houston following Hurricane Harvey: many areas that previously were not zoned as requiring flood insurance were flooded and more frequent catastrophic floods are a symptom of climate change. Many Houston residents whose property flooded in Harvey were not required to have insurance. This raises further questions about how to manage flood loss in the coming years.

It is likely that new flood insurance policies will be harder to obtain and more costly in the future. Currently, legislation is in place that maintains affordability of insurance for homeowners in flood-prone areas. This applies to coastal and inland flood-prone areas. The Federal Emergency Management Administration (FEMA) manages the National Flood Insurance Program.

The map of Lee County, Florida Flood Insurance map, linked below in Recommended Resources (Lee County Flood Zone Map), illustrates the flood zones used to determine flooding risk and therefore the insurance rates to cover flood losses. On this map, the highest risk areas are in red and denote flood zone VE. The pink areas, also at high risk of flooding due to low elevation, denote flood zone AE. The purple areas denote flood zone A. The green areas are flood zone X, or areas with a 0.2% chance of flooding, Yellow areas are in the lowest flood risk zone or outside the 0.2% chance zone. They are also denoted flood zone X.

Recommended Resources:

The following link provides information to homeowners about the current consideration related to flooding costs and rebuilding after a flood: FEMA - Rebuilding after a Coastal Storm

Recommended - examples of flood zones from Lee County Fl (Fort Myers area):

Recommended - Further reading: