Two people were killed in St. Louis. An emergency was declared in West Virginia. At least 37 people were killed in Kentucky. More than 1,000 were stranded in Death Valley National Park. All as a result of separate floods, and all in about a week’s time.
Floods have devastated lives and disrupted communities across the United States this summer. But people are abandoning a federal program in greater numbers than before, coinciding with an agency overhaul that changed premium rates across the country.
The number of federal flood insurance policies purchased has dropped by 9% across the United States over the last year, in the wake of restructuring, called Risk Rating 2.0, that increased premiums for as many as 3.8 million Americans. As a result, hundreds of thousands of Americans may now be putting themselves at risk of losing their homes and goods without a way to recover them.
"In general, there are many factors that could influence this drop in policyholders, including the economic impact of the pandemic, inflation, the housing market, affordability or purchasing flood insurance from the private market. Moreover, the National Flood Insurance Program usually sees growth in years following large flooding events and decline in years without large events," FEMA press secretary Jeremy Edwards said in a statement to Spectrum News. "Therefore, it would not be accurate to directly connect the loss of 500,000 policies to Risk Rating 2.0 — correlation is not causation." Edwards added that FEMA is confident that policies will increase, over time, under the new methodology.
“I think it’s not crazy to think that people are being priced out,” said Carolyn Kousky, an associate vice president for Economics and Policy at the Environmental Defense Fund. Kousky is an expert on the intersection of natural disasters and economics, and recently wrote “Understanding Disaster Insurance” with the goal of creating an introduction to disaster risk and insurance. She, like Edwards, cautioned that there hasn't yet been a good study as to why people are dropping from the program in such great numbers, and cited similar potential economic factors.
"I think where we might be seeing the biggest impact are properties outside the special flood hazard area, which before Risk Rating 2.0, had seen favorable rates," Kousky told Spectrum News.
According to federal data, there are 4.53 million active National Flood Insurance Policies (NFIPs) as of June 2022, the most recent monthly data available. But, according to that same data, there were 450,000 fewer NFIPs in June 2022 than in June 2021.
The greatest change in policy holders over the last 12 months came in Florida, with 164,867 fewer federal flood insurance policies; Texas, Louisiana, California, South Carolina, New Jersey, North Carolina, Virginia, New York and Georgia round out the top 10 of states that lost active NFIP policies between June 2021 and June 2022.
Congress established the National Flood Insurance Act in 1968 to offer flood insurance to properties with significant flood risk. Flood damage is generally excluded from standard homeowner and renter insurance. Rather, flood coverage — specifically coverage for disasters, rather than plumbing incidents — is largely offered by the federal government, though a market for private flood insurance exists. The policies have become a necessity for consumers, who are often required to purchase a flood insurance policy if they live in an at-risk area.
Since NFIPs were introduced, flood insurance premiums were largely based on a property’s position in and around the Special Flood Hazard Area — the 100 year flood plain, which is an area with a 1% annual chance of flooding. That is until 2021, when the Federal Emergency Management Agency (which runs the NFIP program) introduced the Risk Rating 2.0 premium methodology.
Risk Rating 2.0 calculates an property’s premium based on its actual, individual flood risk, rather than its location within flood zones, according to a federal report. Essentially, it’s a modernized system that relies on flood frequency, distance to a water source, property characteristics and cost to rebuild. The legacy system, meanwhile, largely only considered the potential for storm surge and river flooding.
In an April 2021 press release, FEMA stated that Risk Rating 2.0 would “deliver more equitable pricing,” labeling the new practice “Equity in Action.” The agency said that many policyholders with lower-value homes ended up paying more than they should, while those with higher-value homes paid less.
“The new pricing methodology is the right thing to do. It mitigates risk, delivers equitable rates and advances the Agency’s goal to reduce suffering after flooding disasters,” said David Maurstad, senior executive of FEMA’s National Flood Insurance Program.
But FEMA reportedly estimated that as many as 900,000 policyholders — approximately 20% of the total — would drop their NFIP policies over the next 10 years. In a letter to Sen. Robert Menendez, D-N.J., FEMA administrator Deanne Criswell said that the analysis came in a "pre-decisional financial model that was produced using pessimistic assumptions."
In a 2021 breakdown of per-policy monthly premium changes, FEMA calculated that 3.3 million policies, or 66% of total, would increase by up to $10 per month; 522,430 policies (11% of total) would face greater increases, and about 3,200 policies nationwide would increase by more than $100 per month.
On the other hand, the same calculations estimated that 1.16 million policies (23% of total) would decrease by an average of $86 per month.
According to a 2017 report published by Brink News, 99 counties — largely set along the coasts — account for 75% of all residential NFIP policies, with the greatest concentrations of policies in five Florida counties, as well as Texas’s Harris County and Louisiana’s Jefferson Parish.
However, just because there’s a great concentration of policies doesn’t necessarily mean that the majority of households have insurance. In 2017, the Washington Post reported that only 20 percent of homeowners held flood insurance in the areas most affected by Hurricane Harvey. A 2020 poll conducted by the Insurance Information Institute found that only 27 percent of responding homeowners had flood insurance. And according to FEMA, about 40% of NFIP claims come from outside of high-risk flood zones.
As the number of NFIP policyholders has fallen since 2010 (about 5.5 million, according to a 2010 report by the Institute for Political Integrity), the private flood insurance market has grown. According to data collected by the National Association of Insurance Commissioners, there are at least 360,000 active private residential flood insurance policies in the United States as of calendar year 2021, the most recent data available. That’s growth of about 130,000 over the previous year.
“I think where we might be seeing the biggest impacts are properties outside the Special Flood Hazard Areas, which before Risk Rating 2.0 had seen very favorable rates,” Kousky said.
People with insurance tend to recover from disaster better and faster than people without insurance, Kousky said, and people from lower-income households particularly tend to benefit from that cushion.
But there’s a paradox at play: Those who need insurance the most are often the individuals who tend to go without, as part of their personal cost-benefit analyses. Lower-income households then generally have to dip into savings, or make difficult spending cuts on necessary goods and items, to help recover from disasters.
Without insurance, people with limited incomes have little recourse outside of loans (for which they may not qualify), government grants (which generally only cover enough to make a home safe) or other fundraising means.
“There will be some low-income people who may see some premium increases due to all of this,” said Bob Klein, professor emeritus of risk management and insurance at Georgia State University. “I think that offering some kind of relief for them, that would be taxpayer funded, is something that you could potentially justify.”
The United States Government Accountability Office has studied policy options for providing assistance, and lawmakers have attempted to implement overhauls. In 2021, Sen. Bob Menendez, D-N.J., introduced a Senate reauthorization bill that would extend the life of the NFIP program, and also authorize a means-tested program to assist low-income policyholders. That bill was most recently heard in committee on Aug. 4.
Spectrum News has reached out to Menendez for comment.
Regardless of federal legislation, flooding is going to continue, and rates for both the private and public flood insurance markets aren't likely to fall.
"Insurance goes up when risk goes up, and the only way out of this problem is, someone has to pay for it," Kousky said. "So we can cross-subsidize, and shift around who is paying for it but you can't make it cost less when the risk is that high."
And though Kousky credits the federal government for greater infrastructure investments, extreme weather events are trending ever more severe. "Frankly, climate change is making flood risk worse," Kousky said. "We're getting more flooding, more severe storms, and the program is going to see it."