Why the government's flood insurance program is underwater

Summary

Summary of "Why the Government's Flood Insurance Program Is Underwater"

Podcast: The Indicator from Planet Money
Host: Paddy Hirsch and Waylon Wong
Release Date: November 13, 2024

Introduction: Rising Flood Risks and Insurance Challenges

In the episode titled "Why the Government's Flood Insurance Program Is Underwater," hosts Paddy Hirsch and Waylon Wong delve into the complexities of the United States' National Flood Insurance Program (NFIP). Amidst recent catastrophic floods in Spain and severe tropical storms affecting Louisiana, Southeast Texas, Missouri, and Oklahoma, the episode explores why the NFIP, the primary source of flood insurance for American homeowners, is financially strained and struggling to meet the growing demand.

The Historical Context of Flood Insurance

The discussion begins with the personal story of Ben Ayers from Waterbury, Vermont. Ayers' ancestral home, built in 1892, has a long history of flooding, notably in 1927 when the Winooski River inundated the town to depths of 12 to 15 feet. Reflecting on his grandfather’s experience during that flood, Ben notes, “The first big flood in Waterbury happened in 1927... my grandfather... went out of the second story windows in a rowboat to escape to safety” (03:22).

In 1927, the Great Mississippi River Flood caused extensive damage, leading insurance companies to withdraw flood coverage from the market due to the high risks and costs involved. This retreat of private insurers set the stage for government intervention.

Birth of the National Flood Insurance Program (NFIP)

Following the devastating Hurricane Betsy in 1965, which resulted in $1.42 billion in damages and highlighted the absence of flood insurance, Congress established the NFIP. As Cindy Ayers explains, “It was designed as a voluntary program. Communities opt in, and when they opt in... all of their residents become eligible to purchase flood insurance through the program” (05:18).

The NFIP was intended to mitigate future financial burdens on taxpayers by providing a government-backed alternative to private flood insurance. Municipalities that joined the program agreed to implement floodplain management regulations to reduce future risks.

Core Challenges Facing the NFIP

1. Outdated and Inaccurate Flood Maps

One significant issue the NFIP faces is the reliance on FEMA's flood maps, which are often outdated and expensive to produce. Carolyn Kuske, chief economist of the Environmental Defense Fund, points out, “They do not include flood risk from intense precipitation events. And climate change is making intense rainfall more severe and frequent in many parts of the country” (06:45). These outdated maps fail to account for rapid changes in climate and infrastructure, leading to inadequate coverage and increased vulnerability.

2. Low Insurance Uptake

Despite being the primary source for flood insurance, the NFIP struggles with low participation rates. Kuske emphasizes, “Nobody likes to buy insurance. Nobody likes to think about bad things happening or purchase something they hope to never use” (07:09). When the program launched in the late 1960s, community participation and individual signups were minimal. Although coverage has increased to about 5 million properties today, this number remains insufficient to sustain the program financially.

3. Ineffective Mitigation and Development Practices

The NFIP's efforts to reduce flood risks through stringent building regulations have often fallen short. Kuske notes, “Developers don't hold on to the risk long term, they just pass it off... local governments... get the property tax revenue when it's safe” (08:06). This misalignment of incentives leads to continued development in flood-prone areas, undermining the program's mitigation goals.

Financial Strain and Government Reliance

Since Hurricane Katrina in 2005, the NFIP has repeatedly exhausted its funds, relying on federal loans to cover claims. After Hurricane Harvey in 2017, Congress forgave $16 billion of NFIP loans, but the program still carries around $20 billion in debt (09:14). Kuske acknowledges, “FEMA is never going to be able to repay this debt on its own. And the interest costs are adding to the cost of flood insurance for policyholders” (09:26).

Attempts at Reform and Political Obstacles

Efforts to reform the NFIP have been stymied by political resistance, primarily due to proposed premium increases that are unpopular with constituents. In 2012, a significant reform attempt was reversed because “no politician wants to support a measure that's going to raise costs for their constituents” (09:38).

Personal Impact: The Case of Ben Ayers

Ben Ayers represents the individual impact of the NFIP's challenges. Unlike his grandfather, Ayers opted to purchase flood insurance, paying a deductible of approximately $5,000 and annual premiums around $4,000 (10:09). While the costs are substantial, Ayers considers them a necessary measure given the persistent flood risks.

Conclusion: A Program in Peril

The episode concludes by highlighting the precarious state of the NFIP. With increasing flood events driven by climate change and persistent structural issues within the program, the NFIP remains underwater and heavily reliant on taxpayer support. The hosts underscore the urgent need for comprehensive reforms to create a sustainable flood insurance framework that can adequately protect homeowners and mitigate future financial burdens on the government.

Notable Quotes

• Ben Ayers (03:22): “The first big flood in Waterbury happened in 1927... my grandfather... went out of the second story windows in a rowboat to escape to safety.”
• Carolyn Kuske (06:45): “They do not include flood risk from intense precipitation events. And climate change is making intense rainfall more severe and frequent in many parts of the country.”
• Waylon Wong on NFIP Coverage (05:08): “But the program still owes around 20 billion.”
• Ben Ayers on Insurance Costs (10:09): “Our deductible's about $5,000, and we pay about 4,000 something a year for the policy.”

Final Thoughts

"Why the Government's Flood Insurance Program Is Underwater" provides a comprehensive examination of the NFIP's origins, operational challenges, and financial woes. Through personal narratives and expert insights, the episode sheds light on the systemic issues hindering effective flood risk management in the United States, emphasizing the critical need for policy reforms in the face of escalating climate-related disasters.

Transcript

[Paddy Hirsch]

This is the indicator from Planet Money. I'm Paddy Hirsch.

[Waylon Wong]

And I'm Waylon Wong. We've been hearing a lot about flooding in the news lately. Catastrophic floods in Spain and closer to home this week, tropical storms and heavy rains are soaking Louisiana, Southeast Texas, Missouri and Oklahoma.

[Paddy Hirsch]

Insurance isn't the first thing that comes to mind when you're anticipating a flood. But American homeowners who do check their home insurance policies will almost certainly find that they are not covered. That's because most insurers in the US do not cover flood. In fact, pretty much the only place you can get flood coverage is from the government through the nfip, the National Flood Insurance Program.

[Waylon Wong]

Because it's basically the only game in town, you would think the NFIP would be going gangbusters, but the program is not doing well. The NFIP frequently runs out of money and has to ask Congress for a loan.

[Paddy Hirsch]

The result is that the American taxpayer is increasingly on the hook for payments to flooded homeowners. On today's show, we'll find out why that is and learn why the National Flood Insurance Program is struggling.

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[Paddy Hirsch]

Something of a fact of life for the people who live close to the Winooski river, which runs alongside the town of Waterbury in Vermont.

[Ben Ayers]

It flooded in July 2023, it flooded in December 23, and then it flooded again in July of this past year.

[Waylon Wong]

This is Ben Ayers. His house was built by his great great grandfather in downtown Waterbury in 1892. Back then, the Winooski river didn't flood that often.

[Ben Ayers]

The first big flood in Waterbury happened in 1927. Water backed up into the town and it was 12 to 15ft deep. And there's a story of my grandfather as a 10 year old child going out of the second story windows in a rowboat to escape to safety.

[Paddy Hirsch]

And you'd think that this experience might have convinced Ben's grandfather to get flood insurance for his house.

[Ben Ayers]

But no, you know, my grandfather didn't believe in it. He saved money, had a bank account that he set aside, put money into thinking that it would be a better deal for him to self insure.

[Waylon Wong]

The fact is though, that if Grandpa Ayers had wanted to get insurance from a regular insurance company, he wouldn't have been able to get it.

[Paddy Hirsch]

Yeah, that's because 1927 was also the year of the great Mississippi river flood. It caused so much damage and cost insurance companies so much money that insurers stopped offering flood coverage to homeowners almost altogether. Carolyn Kuske is the chief economist of the Environmental Defense Fund, an advocacy organization.

[Carolyn Kuske]

The private sector doesn't want to offer flood. They've had lots of opportunities to provide flood insurance and they're not interested. It's too risky.

[Waylon Wong]

For nearly 40 years, it was almost impossible to buy flood insurance for your house. And then in September 1965, a strong hurricane barreled across the Florida Keys into the Gulf of Mexico where it hammered the Louisiana coastline.

[Paddy Hirsch]

They called that storm Billion Dollar Betsy because it cost $1.42 billion in damages because no one was insured. A lot of that money was paid out to flooded homeowners by the government in the form of disaster relief.

[Waylon Wong]

And it convinced Congress that if the insurance companies weren't going to provide flood insurance, the government was going to have to. And thus the National Flood Insurance Program was born.

[Carolyn Kuske]

It was designed as a voluntary program. Communities opt in, and when they opt in they have to adopt minimum floodplain management regulations in the FEMA mapped floodplain and then in exchange, all of their residents become eligible to purchase flood insurance through the program.

[Paddy Hirsch]

The idea was that municipal governments would vote to join the program and existing residents could buy insurance from the program at subsidized rates. New residents, however, had to pay risk based rates, which were a lot more expensive.

[Waylon Wong]

Meanwhile, those local governments agreed to a set of development rules. The rules were designed to either dissuade governments from building in flood prone areas or to push them to build in ways that limited damage from flooding but were a lot more expensive to implement.

[Paddy Hirsch]

In other words, the rules took aim at both the supply and the demand side of the housing equation in flood zones. The idea was to stop or slow development in these areas so that the government wouldn't have to come and spend billions of dollars in aid every time there was a flood.

[Waylon Wong]

But there was a problem with this plan. In fact, there were three big problems. The first, those maps that FEMA supposed to provide identifying flood risk areas.

[Paddy Hirsch]

Yeah, those maps are very expensive and they take a very long time to make. Years in some cases, and often by the time that they're finished and distributed, they don't reflect changes that have been made in the interim in infrastructure and topography on the ground. What's more, Carolyn says they often don't reflect all of the risks associated with the changes in North America's climate.

[Carolyn Kuske]

They do not include flood risk from intense precipitation events. And climate change is making intense rainfall more severe and frequent in many parts of the country. And lots of people that are now experiencing that rainfall related flooding aren't aware didn't have flood insurance.

[Waylon Wong]

The second problem that the National Flood Insurance Program has had to contend with, low signup rates.

[Carolyn Kuske]

Nobody likes to buy insurance. Nobody likes to think about bad things happening or purchase something they hope to never use.

[Paddy Hirsch]

Yeah, when the NFIP launched back in the late 60s, it was kind of a flop. For one thing, communities didn't opt in in large numbers. And even when they did, residents of those communities simply didn't buy the insurance. And as we've talked about on this show before, insurance programs can only function if there's a large pool of policyholders whose premiums are used to make payouts in the event of a disaster.

[Waylon Wong]

It took until the mid-1970s for the NFIP to get any momentum. Today it covers about 5 million properties. That may sound good, but it's still not enough to sustain the program.

[Paddy Hirsch]

And then there's the third problem. All of those incentives to dissuade cities and developers from building on flood risky land, well, they didn't work. Oversight of the communities who signed up was sketchy and development went on regardless of the risk. Carolyn says this shouldn't really be a surprise.

[Carolyn Kuske]

Unfortunately, we have a lot of misaligned incentives. Developers don't hold on to the risk long term, they just pass it off. So they have every incentive to just build a lot of risky stuff because somebody else is going to pay the cost. Same with local governments. They don't hold the bill later, but they get the property tax revenue when it's safe. So not making risk informed choices, all.

[Waylon Wong]

Of this, the low signup rate, the patchy enforcement, the issues with mapping, it might not add up to a problem if there weren't too many flooding events to contend with. And for a while there in the 70s through the 90s, there weren't.

[Paddy Hirsch]

And then in 2005, Hurricane Katrina hit, then Rita, then Wilma. The NFIP had to handle so many claims that it just plain ran out of money. If it was a private insurance company, it would have gone bust. Instead, it tapped the government for billions of dollars in loans.

[Waylon Wong]

Since then, over the last 20 years, there have been so many flooding events that the NFIP has gone back to the federal well again and again.

[Carolyn Kuske]

The NFIP has been billions of dollars in debt going back to Hurricane Katrina in 2005.

[Paddy Hirsch]

In 2017, after Hurricane Harvey, instead of sending the program into even deeper debt, Congress forgave 16 billion of NFIP loans. But the program still owes around 20 billion.

[Carolyn Kuske]

In the years since then, many stakeholders have all made very clear that FEMA is never going to be able to repay this debt on its own. And the interest costs are adding to the cost of flood insurance for policyholders.

[Paddy Hirsch]

Now, it's not as though Congress isn't aware of this problem. There was an attempt in 2012 to reform the NFIP, but the suggested changes involved increases in premiums. And no politician wants to support a measure that's going to raise costs for their constituents. So the reform was reversed.

[Waylon Wong]

There are other solutions to reduce flood risk to homeowners. For example, FEMA offers support to municipalities to buy out flooded homes so that people can relocate. But in Waterbury, Vermont, Ben Aris has seen how skewed incentives can derail initiatives like that.

[Ben Ayers]

After the floods of last July, FEMA came back in and offered buyouts for people. But the town was very reluctant to approve any buyouts because they didn't want to lose the housing stock. And so there's a way where we're sort of trapped.

[Paddy Hirsch]

Well, not that Ben minds being trapped in Waterbury. He loves the town and he loves his home, which is why, unlike his granddad, he bought flood insurance through the NFIP.

[Ben Ayers]

Our deductible's about $5,000, and we pay about 4,000 something a year for the policy.

[Waylon Wong]

That is not cheap.

[Paddy Hirsch]

No, it's not cheap, but Ben says it is reasonable, given the risk.

[Waylon Wong]

This episode was produced by Giulia Ricci with engineering by Kwesi Lee. It was fact checked by Sierra Juarez and edited by Caitlin Cannon. The Indicators of Production of NPR.

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