Flood Insurance Rates Need to Rise, Study Says

Insurance adjuster examining flooding damage to house
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Roberto Westbrook / Getty Images

Flood insurance rates would need to more than quadruple in order to fully cover the risk posed to the most flood-prone homes, and the government’s stated solution to the problem may cause rates to skyrocket even more.

Nearly 4.3 million homes in the U.S. are at risk of a combined $20 billion in property damage due to flooding, according to an analysis released by nonprofit research group First Street Foundation Monday. Wait 30 years, and the likely effects of climate change push the total clean-up bill for those properties to $32.2 billion, a 61% jump.

Key Takeaways

  • More than 4 million homes in the U.S. are at risk of property damage from flooding, according to an analysis released by nonprofit research group First Street Foundation.
  • Under the current National Flood Insurance Program, insurance premiums would need to increase 4.5 times to cover the properties most at risk.
  • The government will use a new rating system to price flood insurance beginning in October which better captures a property’s flood risk, but allows rates to be raised when there’s a deficit.
  • Experts—and even the government itself—worry rates under the new system might be unaffordable.

Under current National Flood Insurance Program (NFIP) pricing, there isn’t enough money in the system to even cover the current risk. First Street Foundation’s analysis found that NFIP would need to increase rates 4.5 times to cover all the properties presently with substantial flood risk. (Substantial flood risk is calculated as a 1% risk each year of receiving at least 1 centimeter of flooding in a building.) Factoring in climate change, current rates would need to increase 7.2 times by 2051.

“There's a big disconnect between the economic risk that exists in this nation and what we're doing to protect against it,” said Dr. Jeremy Porter, head of research and development at First Street Foundation, a nonprofit research group that studies the nation’s flood risk.

First Street Foundation’s analysis includes all homes at flood risk, not just those currently covered by NFIP.

NFIP is run through the Federal Emergency Management Agency (FEMA), and is based on flood risk designations called Special Flood Hazard Areas (SFHA). Homeowners that have a federally backed mortgage and whose home is located in a SFHA are required to buy flood insurance.

But a study of 23.5 million at-risk properties in the U.S. released by First Street Foundation in June found that there are 70% more properties with a substantial flood risk in the country than included in FEMA’s count. In other words, there are almost as many people outside a SFHA with significant flood risk as there are inside one. Many of these property owners were unaware of the risk because they aren’t on FEMA’s list of designated SFHA zones, First Street Foundation said.

FEMA intends to fix NFIP’s issues this October with a program it’s calling Risk Rating 2.0. The new method  will calculate insurance premiums by considering a property’s distance from a potential flooding source and the cost to rebuild, tying the amount homeowners pay for insurance to their actual flood risk and the value of their specific property. It's the first change in how FEMA calculates flood insurance premiums sce the 1970s. The current system does not account for replacement cost in its current rates.

NFIP’s current structure has led it to run at a deficit, with the Government Accountability Office (GAO) noting the financial condition of NFIP could continue to worsen without changes. GAO has had a close eye on NFIP for a while now, having added it to its “High-Risk List” in 2006 after the program had to borrow from the Department of the Treasury in order to pay claims from major natural disasters.

Risk Rating 2.0’s pricing could solve those issues and give policyholders a clearer understanding of their property’s true flood risk, a Congressional Research Service analysis released in January said. But it also creates a potential problem: unaffordable rates.

The Risk Rating 2.0 program won’t be allowed to run at a deficit like NFIP does now. This means that rate hikes are likely in the near future for flood insurance policyholders. And if the new rates still lead to a deficit for the flood insurance program, rates will be revised further.

This model mimics standard practice in the commercial insurance industry, but has raised questions about affordability.

“No longer is it an insurance company designed to provide affordable insurance for people in places of high risk,” Porter said. “It's moving from a program that was intended to lose money and subsidize risk to a program that is going to operate like a real insurance company in terms of its actuarial process.”