Ecocentric

The Hard Math of Flood Insurance in a Warming World

As subsidized rates of federal flood insurance rise, property owners along the coasts get angry. But we need insurance that reflects the risks of a changing planet

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Emile Wamsteker/Bloomberg via Getty Images

A man walks through flooded streets in Hoboken, New Jersey, after Superstorm Sandy

Thousands of homeowners in flood-prone parts of the country are going to be in for a rude awakening.  On Oct. 1, new changes to the National Flood Insurance Program (NFIP), which offers government-subsidized policies for households and businesses threatened by floods, mean that businesses in flood zones and homes that have been severely or repeatedly flooded will start going up 25% a year until rates reach levels that would reflect the actual risk from flooding. (Higher rates for second or vacation homes went into effect at the start of 2013.) That means that property owners in flood-prone areas who might have once been paying around $500 a year—rates that were well below what the market would charge, given the threat from flooding—will go up by thousands of dollars over the next decade.

That change, unsurprisingly, has affected homeowners from the seaside coast of New Jersey to the Gulf beaches of Louisiana very unhappy. On September 28, dozens of Long Islanders—many of them victims of Superstorm Sandy—converged at the Babylon Town Hall for a “Stop FEMA” rally, one of several held around the country. (FEMA, the Federal Emergency Management Agency, runs the NFIP.) Congressional representatives from states like Louisiana and Florida that are likely to be hard hit by the NFIP changes are raising hell, calling for FEMA to delay the implementation of the new rules. FEMA says its hands are tied—Craig Fugate, the agency’s director, told a Senate subcommittee at the end of the September that the Biggert-Waters Act, the law passed last summer to adjust NFIP rates, gives him no leeway to postpone the changes to NFIP just because they may be unaffordable to some property owners.

Even California Representative Maxine Waters, one of the main co-sponsors of the legislation, has said she wants to delay implementation. (Judy Biggert, the other co-sponsor, is no longer in Congress.) “[I am] outraged by the increased costs of flood insurance premiums that have resulted from the Biggert-Waters Act,” Waters said in a statement. “I certainly did not intend for these types of outrageous premiums to occur for any homeowner.”

So property owners who will see their flood insurance rates are paying the price for the unintended consequences of the Biggert-Waters Act. But take a dive into the very perverse world of subsidized flood insurance, and you’ll see that we as a country have been paying for unintended consequences since the NFIP was born in 1968.The NFIP was created because the private insurance industry was unwilling to provide flood insurance. It simply wasn’t profitable—premiums weren’t sufficient to cover the massive payouts needed in the wake of a big flood. So the government stepped in, offering subsidized flood insurance to property owners, often at below market rates. Today there are about 5.5 million policyholders under NFIP, and about 20% of them—1.1 million—receive subsidies.

But shifting the burden from the private market to the government didn’t suddenly lessen the costs of major floods—especially as more and more Americans moved to coastal areas. (From 1970 to 2010, the population of shoreline counties increased by almost 40%, to 123.3 million people, and is projected to increase by an additional 10 million people by 2020.) By November 2012 the NFIP was more than $20 billion in debt, a number that was expected to grow to nearly $30 million by the time the bill from Superstorm Sandy was finally tallied.

That’s why Congress—with overwhelming support from both sides of the political aisle—passed Biggert-Waters in the summer of 2012. The changes were aimed at those 1.1 million policyholders who were paying far less than what the market value for flood insurance would have been. When rates were raised at the start of the year on second homes, there wasn’t much fuss—it’s hard to justify spending taxpayer money to subsidize a millionaire’s coastal vacation home. (Subsidizing his farm might be different, but that’s another story.) With rates now being raised on a much wider group of policyholders, though, the pain will be that much more intense. Properties covered under the NFIP also used to be grandfathered into old flood maps, but that too will end with Biggert-Waters, which means that thousands of properties that may not have been considered at risk for flooding in the past now will be. And even though rates won’t change for some 715,000 properties that currently receive subsidizing policies, the new rates will kick in when those homes are sold or experience massive flood damage—which means that property values for those homes are already dropping.

But if we’re going to take the consequences of coastal density and climate change seriously, we have little choice. Among the policyholders who will face increasing premiums starting today are those who whose property has been repeatedly damaged by flooding, year after year. Even though those “repetitive loss” properties only account for 1.3% of NFIP policies, they are expected to account for 15 to 20% of future losses. A 2010 study found that even if there were no unusual weather events—which are, after all, the usual cause of flooding—it would take the NFIP 100 years to recoup its losses. This isn’t viable for the future, especially since subsidized flood insurance—by shifting the risk from the individual to the public—has perversely incentivized building in flood-prone areas, which then in turn increases the costs when things go bad. It’s telling that countries that don’t offer subsidized flood insurance haven’t seen the coastal buildup the U.S. has.

It would make sense for Congress to cushion the blow of the new rates, perhaps by offering vouchers for residents who can least afford the more expensive insurance policies. Investing in mitigation—raising homes, protecting coastal communities with sand dunes and seawalls—would also make sense; there has to be a carrot to go along with the stick. But if the pain is great now it’s because subsidized policy owners have essentially been given public money for years, even decades. That couldn’t go on forever—weather alone would make that impossible.

And what’s really scary is that the true risk from flooding is even greater than the new, higher rates indicate. The risk maps that FEMA uses to determine flood insurance rates don’t take into account coastal erosion or sea-level rise, which amplifies the effect of any coastal storm surge. Sea level around New York City has risen by about a foot-and-a-half over the past century, which added to the devastating flood damage during Sandy. The new report from the Intergovernmental Panel on Climate Change predicts that sea level could rise by up to 3 ft. over the next century if greenhouse gas emissions aren’t brought under control—and that figure could be significantly higher in some cities, thanks to coastal erosion and sinking. A recent study found that if no actions are taken to reduce flooding risk, losses could approach $1 trillion by mid-century—and that’s assuming sea level rise of just 15.8 inches.

The truth is we’re nowhere close to preparing ourselves for the risk that extreme weather, coastal flooding and sea level rise will pose to the country—and we pile more people and more property along the danger zone, we’re going backwards. “It’s a tough decision,” says Tom Herrington, a civil engineer at the Stevens Institute of Technology’s Center for Maritime Systems. “When we talk about sustainability [for coasts] we’re talking about long-term planning. But politicians think in every four years.” It will hurt in the short term, but fixing federal flood insurance is going to be necessary for the long term.

41 comments
UnjustifiedFloodRates
UnjustifiedFloodRates

September 2013:Based on the most recent edition of NFIP/FEMA flood maps there are 77 residential condominium buildings located in very unfavorable "V" flood zones in Gulf Shores and Orange Beach.As of September 2013, The NFIP has approved 74 of them for LOMR's. It appears the total combined annual revenue loss to the NFIP/FEMA for these condominium buildings is somewhere between $5,500,000 and $6,000,000 a year.

If the intent of Congress is to make the program actuarially sound why did they, and do they continue to allow the NFIP/FEMA to approved these buildings for LOMR's without investigating this issue in detail?

Obviously FEMA officials and Congress expect innocent homeowners and small business owners that followed FEMA's rules to make up this deficit.These condominium owners are receiving what appear to be extremely low unjustified flood rates at the expense of coastal homeowners around the entire country.No individual homeowner or small business owner should have flood premiums raised until Congress and FEMA get to the bottom of this issue.

UnjustifiedFloodRates
UnjustifiedFloodRates

Continued

All of these buildings were located on the beaches of Orange Beach and Gulf Shores, Alabama.FZC submitted the buildings even though they were located in high velocity flood areas. Local flood engineers said these buildings would not qualify for LOMRs and most refused to attempt any rezoning.Many of these buildings had been heavily damaged from flooding during Hurricanes Erin and Opal in 1995, Hurricane Danny in 1997, Hurricane Georges' in 1998 and all of them suffered massive flood damage during Hurricane Ivan in 2004.

Unbelievable:The Flood Plain Managersfrom Gulf Shores and Orange Beach assumed the NFIP would decline the request for LOMR's because the NFIP was operating at an $18 billion deficit at that time and many of these buildings had already been placed in the NFIP Repetitive Loss Program.Both Flood Plain Managers disagreed with the information that was being submitted to the NFIP and each one of them refused to sign concurrence lettersthat were required when applying for a LOMR.The NFIP ignored these Flood Plain Managers and approved the LOMR's anyway.

UnjustifiedFloodRates
UnjustifiedFloodRates

Homeowners that have never been flooded should not be expected to make up the deficit of the National Flood Insurance Program (NFIP) when FEMA gives, what appear to be unjustified, massive premium reductions to gulf front condominium buildings that have been paid millions of dollars in NFIP flood claims.

July 6, 2012:The President signed the Biggert-Waters Act authorizing a five year extension of funding for the National Flood Insurance Program (NFIP).It was also intended to make the program actuarially sound.  Implementation of sections 205 and 207 of the Biggert Waters Act are going to create tremendous rate increases for thousands of homeowners and small businesses along the entire gulf coast along with coastal properties around the country.This action doesn't seem to be justified when you consider the fact that over the last three years FEMA approved Letters of Map Revision (LOMR) on Alabama's Gulf Front condominium buildings that they had previously placed in the NFIP Repetitive Loss Program.These condominium buildings received millions of dollars in NFIP claim payments yet FEMA decided they are not in velocity flood zones and reduced their flood premiums by an average of almost 93%?

Desertphile
Desertphile

One can not really feel sorry for people who must now pay a fair cost for flood insurance after not doing so for many years. But a healthy society is supposed to support and defend all of its members in as fair a way as possible--- which is what subsidies are designed to do (even the vast wealth the USA government gives to the petroleum industry is "for our own good").


The cost of burning fossil fuels that people have been paying does not reflect a fair cost: the expenses of adverse health, rising sea levels, lower food production, invasive species migration, and other effects are not included "at the pump." A "carbon tax" would include these expenses and make the price of burning gasoline and other fuels fair.

20minuteslater
20minuteslater

This article is inaccurate in a very misleading way. I live in a land locked state. I do not live near a river, lake or ocean. My house is 30+ years old and has never flooded. Thus, I do not live in a house that has been "severely or repeatedly flooded". I live in a house that has NEVER been flooded. And yet the rate for my house is increasing by of 500%. Writing that this only effects houses that have been flooded is extremely misleading and in such a way as to justify the extreme harm this is doing to people ALL OVER THE COUNTRY. It implies that the people effected acted foolishly in purchasing their homes and thus deserve to be threatened with losing their homes or their homes value. Also left out is the fact that the 25% incremental increase only applies if you don't want to sell your house. I moved a few months ago and have been trying to sell my old house. I found a buyer and we were set to close but none of us knew about this. My insurance agent didn't know about it. Once the flood insurance was factored in, the buyers couldn't finance the house. The increase in flood insurance rates have devalued my house by $75,000. Also left out is the fact that these rates don't seem to be reasonable. How the hell is flood insurance for my house 5% of the value of my house when I'm in a zone that according to FEMA has a 1% chance of flooding? How the hell is my flood insurance twice the amount of my home owner's insurance? Another thing to chew on for all the people whose comments reflect the judgmental attitude this article has encouraged: If I can't sell my old house, I can't buy a new one in the city to which I moved. So...yeah. This is going to effect ALL OF US. If you think you're safe, first you should double check your house on the new FEMA maps. When I bought my house it was near a flood zone but not in it. They redrew the maps (even though there had been no flooding) and I had to get flood insurance which wasn't too much of a burden because the rates were reasonable. Now, the squiggly lines some bureaucrat drew on a map have stolen my home's value. The second thing you should do is ask yourself if you live in a vacuum. Because if you don't, this is going to effect your property values. It'll just take a little longer for the ripples to hit.

emeraldseatown
emeraldseatown

So the federal government actually decided to stop subsidizing poor choices?

MoreySoffo
MoreySoffo

If you live in a flood-prone area, think of it as a "pre-existing condition."  

julesga
julesga

By the way -the people who will be hurt the most by thio are those in modest older houses that were built long before FEMA and the NFIP even existed.  (called pre-FIRM houses)  Those houses were built to the standards of the day yet will be hammered with the loss of grandfathering.    I didn't even know I had a subsidized premium - nothing on the policy documents states your premium should be X but you are subsidized Y.   


forresdh
forresdh

He forgot about the part where, since FEMA is out of money, they are remapping to pull in people who have never previously had to buy flood insurance.  And consequences of laws made by politicians who had no idea what the fallout would be.  Shocking I say, simply shocking.  One of them no longer in the business and the other trying to back-peddle now.  Pfft.  Business as usual.

JKBullis
JKBullis

Sea level has risen about a foot and a half around New York City?  Is that true everywhere?  Or do they have special difficulty measuring sea level there?

JohnDavidDeatherage
JohnDavidDeatherage

Subsidies are bad. They induce market participants to take risks they would/should not otherwise take.  That includes building construction in areas that have too high a risk of flooding. Price flood insurance accurately and we would not build in many low flood prone areas.


julesga
julesga

Hurt? It will hurt?  No, it will be an absolute disaster.  I bought a house in December 2012 after making sure I could afford flood insurance. Unbeknownst to me, my insurance agent, my realtor, and my mortage company were these massive rate increases slated to go into effect.   So, now I own a house I paid $125,000 for, the replacement cost would be in the  range of $85,000 but my flood insurance is going up to $7052 this year.  It will eventually go up to $12,000/year.  I am at a loss to understand how that reflects the actual risk for flood.  How is paying insurance equal to the value of my house every 8-10 years reasonable? 

Secondly, the flood insurance program has collected $65.3 billion in premiums since 1978, but only paid out $56.4 billion to policyholders.   How can it possibly be in debt??  How has the "subsidy" caused the debt? 

The end result of this is I, along with the majority of the homeowners on my street, will go into foreclosure.   Property values will plummet and taxes on remaining homes will rise.    Then it will really affect the taxpayers. 

julesga
julesga

@JohnDavidDeatherage  The thing is, the "subsidized" houses are the ones that were built before NFIP existed.  Subsidies had nothing to do with the construction of those houses. 

JohnDavidDeatherage
JohnDavidDeatherage

@julesga Do you live in New Orleans? Below sea level and between the Gulf of Mexico and Lake Pontchartrain? No risk of flooding there.....

chenopod
chenopod

@julesga" It will eventually go up to $12,000/year.  I am at a loss to understand how that reflects the actual risk for flood.  How is paying insurance equal to the value of my house every 8-10 years reasonable?"
--Would you be willing to pay a cost that does reflect the actual risk for flood?

JKBullis
JKBullis

@julesga  

From your report, it sounds like the article was incomplete.   It would be interesting to know how the real cost of covering the risk is calculated, and no, the market rate is not quite the same. 

The real irresponsible act by government was when they misled people into thinking flood zones could be realistically insured.   But it is also unfair to take away the benefit in such a short time.  At least there should be some gradual transition, though there is an inevitable loss in property value, no matter what.

chenopod
chenopod

@JohnDavidDeatherage @JKBullis 

Slate did an explainer about sea levels around the time of Katrina. This is from the article:

"Stable features such as underwater mountains can affect the local sea level. So can systematic variations in water temperature, air temperature, and currents. Topographical features and predictable weather patterns cause parts of the Atlantic Ocean, for instance, to be 40 centimeters lower than parts of the Pacific Ocean. (The Panama Canal spans a sea level difference of 20 centimeters.)"

http://www.slate.com/articles/news_and_politics/explainer/2005/08/how_do_you_measure_sea_level.html

JKBullis
JKBullis

@JohnDavidDeatherage @JKBullis  

Well, of course it can, as with the Atlantic and Pacific across Panama.  But other than major tidal effects, water knows how to run down hill.  Thus, there are no hills in the ocean.

julesga
julesga

@chenopod @julesga  Yes, I would.  I would like to know how the "actual risk" is calculated first.   I pay about 1k/yr for homeowners (fire, theft, liability, dog bites man, etc).  So, how is the policy that protects against ONE hazard calculated to cost 12x as much? 

RayLehmann
RayLehmann

@JKBullis @julesga There is a gradual transition. For subsidized properties, risk-based rates are phased in over a four year period. For remapped properties, they are phased in over a five year period. And the law was passed in July 2012, six months before JulesGA bought her/his home, so the changes that were coming were a matter of public record. It sounds to me like the problem was incompetence or outright negligence on the part of the insurance and real estate agent.

MoreySoffo
MoreySoffo

@JohnDavidDeatherage @JKBullis There are differences in sea level, sometimes by several meters.  The oceans actually have "hills" in many places.  Any oceanographer will confirm this.  Mean sea level is commonly used in computations but there are sometimes significant differences.  As a retired US Navy Sailor, I often encountered one off Roosevelt Roads, PR. When briefing pilots pre-flight, our location there could affect altimeter adjustments.  The oceans are not as flat as one would assume.  Further, the Mediterranean Sea is higher than the Red Sea, which is a reason for the locks on the Suez Canal; the locks on the Panama Canal raise ships up and down because of the lake; the locks on the Suez inhibit draining of the Med into the Red.  If not for the locks, the Suez would flow continuously one way.  

JKBullis
JKBullis

@JohnDavidDeatherage @JKBullis  

This came up when they built the Panama Canal, though it was nonsense in that context.

There are dynamic tidal effects that do keep the balance offset.  

But that is still not the point, since the imbalance is due to moon and sun, and their mass is more or less stable.   And ocean heat content is quite well distributed over the globe area, so the dynamic effects would seem to be uniform, globally.

JKBullis
JKBullis

@JohnDavidDeatherage @JKBullis  

Probably, since it is at Panama.  But the point is that warmer oceans should make the change due to global warming about the same everywhere.

It does not seem to be happening on the West Coast.   I am just skeptical of the report on that point.

emeraldseatown
emeraldseatown

@julesga @JohnDavidDeatherage It may be that your fire insurance is underpriced.

Also, what is the likelihood that your house will be destroyed by fire in a given year? Even if the likelihood of a fire is higher, the likely destruction may be lower, so lower rates.

CWCCFM
CWCCFM

@julesga @JohnDavidDeatherage 

Your numbers are way off.  As of 2005, total premiums since 1978 totaled about $16B.  In one event, Hurricane Katrina, the claims were more than all the premiums collected since 1978.  Currently, I believe FEMA collects about $3B a year in premiums.  Their current debt is about $25B  . 

JohnDavidDeatherage
JohnDavidDeatherage

@julesga @JohnDavidDeatherage the source you cite shows NFIP has had losses of nearly 18 billion dollars.... 1969 through last year....

Net$Surplus$/$Deficit $$$$$(17,747,071,000)


again, quoting your source:  "Tobeclear,GNO,Inc.iscommittedtoafinanciallysolventNFIP andpremiumsthatreflecttruerisk.  We do not support policies that create moral hazard by incentivizing building in harm’s way"

FYI.... premiums that reflect true risk are not subsidized...


julesga
julesga

@JohnDavidDeatherage @julesga

Source: http://sjbparish.com/pdfs/NFIP%20Report%20FINAL%202013%2009%2010%20(2).pdf   

Of course I was not forced to buy that house. Neither of the 5600 other pre-firm houses  (total of 11k houses in my county have flood) in my county were forced purchases.  Nor I was promised flood would never go up.  By the same token I had no information that my house was 'subsidized".  Nothing on my policy indicates it is.  I would have re-assessed the purchase had I known this. 

I am not in favor of subsidies either. I am also not in favor of having information virtually withheld from me and then have a 1000% increase over the course of several years.   I do not believe the increases are in fact actuarially sound.  Why does it cost 12x more to insure against a flood (that hasn't happened where I live in 200 years) than it does fire? 




JohnDavidDeatherage
JohnDavidDeatherage

@julesga @JohnDavidDeatherage Cite your source for premiums paid in and claims paid out.  Who forced you to buy that particular house? Did someone promise you that flood insurance premiums would not rise?

And yes, I still think subsidies are bad economic policy.

julesga
julesga

@JohnDavidDeatherage @julesga  I am all for paying what my flood insurance *should* cost.  What I can't wrap my brain around is why flood insurance for a house built in 1940 that has never flooded costs 12x more to insure against floods than it does for fire, theft, etc.   

I also can't figure out how the NFIP is broken when $65.3 billion in premiums have been paid since 1978, but only  $56.4 billion has been paid out policyholders.  Hmm, could it be that the uninsured people getting free money after a disaster has broken the program? Could it be that congress raided the reserve each year?   Naw, let's blame it on the freeloaders with "subsidized" insurance.  



julesga
julesga

@chenopod @julesga  It would - except insurance companies get a 30% commission for each policy they write yet they have no exposure.  Talk about a subsidy!  They understandably don't want to get out of that briar patch.  

chenopod
chenopod

@julesga @chenopod 

It sounds like the best thing for you would be if the government got out of the way then. Without subsidies market forces would set the rates and you could make the best deal possible with the insurance company of your choice. 

julesga
julesga

@RayLehmann @JKBullis @julesga    They were a matter of public record - as in idf one is in the habit of reading the Federal Register everyday one could have determined something changed but no details.  Secondly, it wasn't until FEMA started releasing information in March 2013 that any details of any type were available- but those were still sketchy and only on static websites.   

As for it being a gradual transition -- there isn't much gradual about a 400% increase in year one.