Flood insurance overview

Flood insurance is a type of insurance policy that offers protection for homeowners, renters, or businesses who want to protect themselves from financial losses due to property damage or losses as a result of a flood. For the purposes of insurance, a flood is defined as an “excess of water (or mud) on land that is usually dry.”

Standard homeowner's insurance policies from private companies do not cover flood damage, because insurance is based on the principle of shared risk. Insurance companies are responsible for protecting many people, but they make a profit because they collect insurance premiums from all their customers, and they only have to pay a few customers for damages. This is because the risk that something bad (like a fire or a burglary) will happen is spread over large numbers of people, lowering the probability of insurance payouts. In contrast, events like floods affect many people at the same time. In addition, people who live in floodplains, locations where the geographical features of the landscape make floods particularly likely, are the ones who are the most interested in buying flood insurance. Therefore, private companies consider flood coverage to be too expensive and risky, because they would have to pay the huge cost of recovering from such disasters.

To deal with this problem, the Federal Emergency Management Agency (FEMA) runs a National Flood Insurance Program (NFIP) that covers expenses for damages caused by flooding. Even homeowners who live in Special Flood Hazard Areas, where the risk of flooding is relatively high, are eligible for flood insurance under this program. In recent years, there has been controversy over the issue of flood insurance, especially in the wake of Hurricane Katrina in 2005. After losing their homes or having them suffer significant damage, many people found that they did not have adequate insurance coverage to pay for the expenses, even though they believed they did. As a result, the NFIP was suddenly thrown into billions of dollars’ worth of debt. The United States government is trying to determine how to reform the program so that it can better cope with similar widespread flooding situations in the future. Taxpayers who do not live in flood-prone areas are unhappy about bearing the burden of paying for flood damage. They believe that in the case of the extremely expensive problem of repetitive loss properties, owners of these properties do not pay insurance premiums that are high enough to cover the actual cost of protecting their buildings.

Understanding the Discussion

Catastrophic Coverage: Special insurance that covers damages resulting from specific catastrophic events (unusually severe disasters that affect a large number of people). Many private insurance companies do not offer catastrophic coverage.

Federal Emergency Management Agency (FEMA): The U.S. government agency responsible for planning for, preventing, responding to, and helping communities recover from disastrous events.

Insurance Premium: The amount of money an insured person or organization pays to an insurance company in exchange for financial protection if a disaster damages their property.

National Flood Insurance Program: A federal program of insurance (managed by FEMA) that provides flood insurance to communities that agree to take steps to reduce their own risk of flood damage; may be abbreviated NFIP.

Repetitive Loss Properties: Buildings that stand in high-risk flood areas and have been repaired or restored after flood damage multiple times.

Special Flood Hazard Areas: Areas within a given geographic region that have been determined to be at a 1 percent or greater risk for flooding in any particular year.

History

According to a report issued by the Congressional Research Service, floods are the most common form of natural disaster in the United States; they also cause more damage and take more lives than any other natural disaster. Although certain geographic locations are especially prone to floods, they can happen anywhere, at any time of year. Despite these facts, until recently there were few good options available to people who had suffered flood damage and needed financial help to recover. There was no comprehensive federal system of assistance, and it was rare for private insurance companies to offer flood insurance because it is not a profitable endeavor.

Throughout most of US history, people generally depended on various forms of government assistance, did their best to help each other, or turned to charities or religious organizations when a severe flood occurred. This was the case even with such significant disasters as the 1913 Ohio flood, which caused over 400 deaths, or the 1927 Mississippi River flood, which resulted in over $200 million worth of damage.

The federal government did play an important role in dealing with floods: it paid to build structures that would contain waters in the event of a flood, such as dams and levees (artificial walls along the banks of a river or sea). The government also paid to assist victims of disasters. However, it was extremely expensive to build flood control structures and to cover the damages caused by flooding. The government simply did not have enough funds to continue to accept the financial responsibility. Additionally, people continued to live and build homes in areas that were at high risk of flooding. Congress wanted to devise a solution to both of these problems.

Congress made its first attempt to create a nationally sponsored flood insurance problem in 1956, with the Federal Flood Insurance Act. This required private insurance companies to offer insurance premiums for floods at a reduced rate, with federal funds paying for the difference. However, Congress failed to set aside funds to pay for the program, and it failed.

The National Flood Insurance Act, which was passed in 1968, allowed people to buy insurance from the government that would protect them from financial losses due to damages caused by flooding. However, in order to qualify for the new National Flood Insurance Program (NFIP), communities had to show that they were properly preparing for floods. They had to make sure that every new building was constructed in a manner that made it more resistant to flood damage. Older buildings, or new buildings that did not meet these standards of construction, could still be insured, but the insurance premiums for such buildings would be higher.

At first, few communities chose to participate in the program. In 1973, Congress passed the Flood Disaster Protection Act. This made it mandatory for buildings that were at risk of flood damage to be covered by flood insurance. Otherwise, the communities that owned these buildings could not receive any federal aid, borrow from banks that were insured by the government, or obtain disaster assistance from the government. As a result of the act, over 2 million flood insurance policies were purchased from the federal government by the end of the 1970s.

When the NFIP was first established, it was managed by an agency known as the Federal Insurance Administration, part of the Department of Housing and Urban Development. In 1979, FEMA took over administration of the NFIP. One of FEMA's goals was to make the program self-sufficient, rather than allowing it to borrow from the Treasury in order to pay for insurance claims. By 1986, FEMA appeared to have achieved this, mainly by increasing insurance premiums.

The NFIP has undergone many changes since its creation, including important reforms in 1994 that increased the amount of coverage an insured person could buy, and required banks to ensure that homeowners bought flood insurance as a condition of their mortgage agreements.

As of 2016, the program had 5.08 million policies in force, which covered $1.25 billion of insured property. It collected $3.3 billion in annual premiums.

Flood Insurance Today

In the twenty-first century, the national conversation about flood insurance has been largely shaped by the events of the 2005 hurricane season. The devastating effects of Hurricane Katrina in states such as Louisiana, Mississippi and Texas made it clear that the national system of flood insurance was not equipped to deal with damages on such a tremendous scale. About 1.75 million separate insurance claims were filed in relation to damage caused by Hurricane Katrina, at a combined cost of more than $40 billion. Controversy surrounds the fiscal aftermath of Katrina, and the cooperation of private insurance companies in paying for covered damages. Although private insurance companies are not required to pay for damage caused by floods, they are supposed to cover damage caused by winds. Many homeowners hit by Katrina have argued that wind was the real cause of the destruction of their property.

Since 2005, Congress has debated several potential reforms to the NFIP, which is now billions of dollars in debt. It has increased the amount of funds the program is allowed to borrow from the Treasury, but many people do not consider this a long-term solution. There have been calls for the government to further raise insurance premiums, especially for those who live in Special Flood Hazard Areas or own Repetitive Loss Properties.

In addition, some recommend that there should be stricter rules about what construction is allowed in coastal areas that are at high risk of flooding. There is talk of expanding the insurance policies the government sells to include payment for damage caused by wind as well as water—as the failed H.R. 1264: Multiple Peril Insurance Act of 2009 would have done. FEMA buyouts of repetitive loss properties appears to have broad support, as a Pew Charitable Trust poll from April 2017 found that 75 percent of respondents favored that response.

In May 2009, Florida US Congressman Ron Klein introduced the Homeowners' Defense Act of 2010 (H.R. 2555), which would have supported lowering costs by permitting states to participate in a national disaster insurance pool that would allegedly spread risks of disasters. Although the bill died in committee that session, it was reintroduced in 2011, 2013, and 2015 and a similar bill was read in the Senate in 2009 and 2013.

However, these reforms are unpopular with many people. Those who live in flood-prone areas do not wish to see their insurance premiums go up and may not have the funds to move elsewhere. Others do not wish to see the government involved in flood insurance at all, because they believe the NFIP really relies on subsidies from taxpayers who live in areas where floods are less common. The free-market think tank R Street Institute and nonpartisan Taxpayers for Common Sense, among others, argue that the government must stop subsidizing those living in and moving to at-risk areas. Some contend that flood insurance should be privatized and that property owners in high-risk areas should pay market rates to cover expected damage and that subsidies are unsustainable. Environmentalists point out that the risk of flooding will only worsen as seas rise and storms intensify.

In 2012, Congress voted to phase out subsidies for owners of vacation properties, commercial buildings, and repetitive loss properties in high-risk areas in an effort to improve the NFIP balance sheet. That autumn, Superstorm Sandy devastated the Mid-Atlantic and Northeast, especially the New Jersey Shore and New York City. A joint NPR and Frontline report estimated that the private insurers who managed claims for FEMA received up to $400 million in profit, without issuing any claims money, because of doctored reports. In March 2015, FEMA reopened claims review for more than 140,000 claimants. Contracts were subsequently revised and the appeals process reformed. And in 2013, complaints over the rate increases led Congress to backtrack on the subsidy changes they had enacted.

The NFIP was up for reauthorization in late 2017, by which time the program owed about $30 million. Although the House achieved a deal including rate changes and measures to allow greater free-market competition, Congress had not concluded the matter by year's end and the NFIP's status remained unresolved.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

Bibliography

Books

Daniels, Ronald R., Donald F. Kettl, and Howard Kunreuther. On Risk and Disaster: Lessons from Katrina. Philadelphia: U of Pennsylvania P, 2006. Print.

Irwin, Ella Grace. Flood and Homeowners Insurance: Considerations for Expanding the Role of Private Insurers. New York: Nova Science, 2014. eBook Collection (EBSCOhost). Web. 19 Oct. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=776108&site=ehost-live.

Kolberg, Judith. Organize For Disaster: Prepare Your Family and Your Home for Any Natural or Unnatural Disaster. Decatur: Squall, 2005. Print.

National Flood Insurance Program. Flood Insurance Manual. Washington: National Flood Insurance Program, 2003. Print.

Zevnik, Richard. The Complete Book of Insurance: Understand the Coverage You Really Need. Naperville: Sphinx, 2004. Print.

Periodicals

Cottle, Michelle. "Can Congress Bring the National Flood Insurance Program above Water?" The Atlantic, 5 Aug. 2017, www.theatlantic.com/politics/archive/2017/08/congress-flood-insurance/535731. Accessed 12 Jan. 2018.

Knowles, Scott Gabriel, and Howard C. Kunreuther. “Troubled Waters: The National Flood Insurance Program in Historical Perspective.” Journal of Policy History 26.3 (2014): 327–53. Academic Search Complete. Web. 19 Oct. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=96390324&site=eds-live.

Michel-Kerjan, Erwann, Sabine Lemoyne de Forges, and Howard Kunreuther. “Policy Tenure under the U.S. National Flood Insurance Program (NFIP).” Risk Analysis: An International Journal 32.4 (2012): 644–58. Digital file.

Neeley, Josiah. "Subsidizing Disaster." American Conservative, vol. 15, no. 5, Sept.–Oct. 2016, p. 9. Points of View Reference Center, search.ebscohost.com/login.aspx?direct=true&db=pwh&AN=117495620&site=pov-live. Accessed 12 Jan. 2018.

“Overlook This Coverage at Your Peril.” Consumer Reports Money Adviser 10.8 (2013): 6–7. Business Source Complete. Web. 19 Oct. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89652046&site=eds-live.

Valacer, Jeffrey. “Thicker Than Water: America’s Addiction to Cheap Flood Insurance.” Pace Law Review 35.3 (2015): 1050–79. Academic Search Complete. Web. 19 Oct. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=103674377&site=eds-live.

Walsh, Mary Williams. "A Broke, and Broken, Flood Insurance Program." The New York Tinmes, 4 Nov. 2017, www.nytimes.com/2017/11/04/business/a-broke-and-broken-flood-insurance-program.html. Accessed 12 Jan. 2018.

Websites and Digital Files

Cleetus, Rachel. Overwhelming Risk: Rethinking Flood Insurance in a World of Rising Seas. Cambridge: Union of Concerned Scientists, 2013. Digital file.

Grunwald, Michael. “Hell and High Water.” Time. Time, 8 May 2014. Web. 29 Dec. 2014.

Joyce, Christopher. “Federal Flood Insurance Program Drowning in Debt. Who Will Pay?” NPR. NPR, 1 Jan. 2014. Web. 29 Dec. 2014.

Sullivan, Laura. "Business of Disaster: Insurance Firms Profited $400 Million after Sandy." All Things Considered. NPR, 24 May 2016. Web. 15 June 2016.