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.