Wealthy homeowners should be insured by the market.
Wealthy homeowners should be insured by the market.
A lmost everyone agrees that the Federal Emergency Management Agency (FEMA) has been badly run, is often ineffective, and has failed to help many disaster victims. President Trump has repeatedly suggested downsizing FEMA and moving to the states the responsibility of disaster preparedness, response, and recovery.
Last week, a task force that he had appointed issued recommendations that, if implemented, would move us a good distance toward that goal. States would gain more control over federal disaster funds, but the bar for getting these funds would be raised, reducing federal costs and incentivizing states to prepare better for disasters.
Some of the biggest proposed changes are to FEMA’s 56-year-old National Flood Insurance Program (NFIP), much of which would be moved into the private market, thereby better aligning premiums with risk. Flooding is the costliest natural disaster in the U.S.: almost 20 million properties are at high risk, according to data from the research firm First Street, but only around 5 million homes have flood insurance — and 90 percent of it is from NFIP.
The program’s approach, which guarantees coverage to even the most frequently flooded homes, is broken. It is $22 billion in the red, even though $16 billion of its debt was forgiven by Congress in 2018. It has enabled slow, inefficient disaster response, poor mitigation, and moral hazards. Developers build more in dangerous flood and fire zones than they otherwise might have, knowing Uncle Sam will cover the tab. The result is costlier, deadlier disasters. High-income households in our nation’s most expensive zip codes are the big beneficiaries of subsidized flood coverage. Six states — Texas, Florida, New Jersey, New York, Louisiana, and North Carolina — account for 86 percent of the $42 billion in claims that have been paid by federal flood insurance since 2010, according to FEMA.
Trump’s task force recommends shifting insurance coverage in high-risk areas to private insurance companies and moving faster to map flood risk so that fewer homes are built in harm’s way. Flood modeling has improved dramatically in the past decade, but FEMA’s method of doing so is vastly outdated and incomplete. More than one in five of its flood maps is at least a decade old, a study last year by mortgage firm Fannie Mae found. The need to reform the program is therefore urgent. Funding for it runs out at the end of May, and Congress is likely to extend it for only a few months at a time.
One pressing problem is that Congress hasn’t revised the flood insurance program’s payout cap for building damage — $250,000 — since 1994. Over the past three decades, however, the average cost of rebuilding a home has more than doubled. Private insurers can offer higher coverage limits, but the market isn’t growing fast enough to compensate for the decline in the number of federal policies. Trevor Burgess, a former Morgan Stanley investment banker who is now CEO of Neptune Flood, says there are currently fewer than half a million private flood insurance policies in the U.S. He told Reinsurance News that, using data science and AI-driven underwriting, private insurers “are uniquely positioned to close the coverage gap.”
No doubt the Trump task force was reluctant to recommend more radical reforms to flood insurance for fear that premiums for some people would go up too quickly. But change is now inevitable, and it’s important that Congress begin a transition to a private flood-insurance market that includes some targeted, means-tested subsidies for vulnerable populations. Anything short of that would leave taxpayers on the hook for way too much risk and perpetuate the disaster that federal flood insurance has become.