Why can’t the cost of flood insurance rise?

By Felix Salmon
August 30, 2011
Ben Berkowitz has a big report on the the National Flood Insurance Program -- something which is a veritable bucket of fail.

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Ben Berkowitz has a big report on the the National Flood Insurance Program — something which is a veritable bucket of fail. In a nutshell, it undercuts private insurers and therefore is the only game in town; it insures only a small minority of homeowners; and it loses gobs of money. In September 2005, the NFIP was $1.5 billion in hock to the federal government; that number has now ballooned to $21 billion, and is certain to rise further.

There’s a simple answer to all these problems: let the NFIP raise its rates. And I don’t understand why it’s not being allowed to do so. If the rates rose, then that might allow private insurers into the flood-insurance game, giving consumers a choice and helping to get the word out about how insuring your home against flood damage is a really good idea. The NFIP could become profitable, and thereby start paying back all the money it owes. And while homeowners are quite price sensitive when it comes to flood insurance, the fact is that so few homeowners take out flood insurance right now that the number would be unlikely to fall dramatically if rates went up to a reasonable level.

The NFIP, then, is in a fundamentally much better place than, say, the Post Office, which is also losing billions of dollars but which doesn’t seem to have any way out of its present quandary. And I’m still very unclear on what the problem is here — what vested interests are preventing the NFIP from raising its rates. It’s not that people couldn’t afford flood insurance if the rates went up — the rates are very low right now, and in any case most people aren’t paying them anyway, with 95% of homes uninsured.

Are the 5% of homeowners who take out this insurance people with particular political clout, fighting hard and successfully to prevent even a modest increase in their modest premiums? Is the political opposition coming from legislators who don’t want to vote for anything which smells as though it might be related to global warming? Or is this just general low-level government dysfunction? Whatever it is, the problem seems to reside, weirdly, in the Senate rather than the House — a plan to allow NFIP to raise its rates has already passed the House by a vote of 406 to 22. If that lot can come to bipartisan agreement, what could possibly be the holdup here?


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I would guess the holdup may be Senators from the Great State of Louisiana or Florida + Filibuster.

Posted by Taurabora | Report as abusive

I think you might want to ask Berkowitz to re-research his piece. Most people I know, don’t want to pay into the NFIP program, and want their areas to be taken out of FEMA’s flood zone maps, because they stubbornly believe there is no reason to pay for flood insurance.

You CAN purchase flood insurance easily in areas that aren’t marked as flood zones, from private insurers — obviously the risks are LOW for insurers. This is something to be remembered when the next Cat3 (or higher) hurricane makes landfall, and insurers once again announce that they will stop writing new policies or dropping existing ones against hurricanes.

But besides the NFIP insurance program, the NFIP maps also place certain building restrictions and construction standards (via local zoning code restrictions) that are meant to minimize damage and prevent new buildings from increasing the flood zone areas by displacing volume capacity.

Posted by GRRR | Report as abusive

To flesh this out a bit more, they’d need to 1.) announce that at some point in the future, they would be raising their rates, and 2.) commit to keeping those rates high for a certain period of time. There’s both a lead time and a cost to entering this market.

Posted by absinthe | Report as abusive

When I was a kid, my real-estate industry father said that flood insurance was what greased the skids of the mass conversion of farmland into suburban tracts. If suburban homeowners had to pay the actual price for living on land which routinely flooded, they were unlikely to buy that four bedroom house on the cul–de-sac. The NFIP gives the veneer of a functioning insurance system to the mortgage holders and homeowners to cover the “rare” event of a flood.

My mortgage holder requires me to hold (and maintain) flood insurance for my condo. The annual premium is actually slightly more than the annual premium for my homeowners insurance.

Any flood event which would trigger the insurance would require the flooding of much of New York City (I live on effectively the 4th floor of a building in the city’s “Zone A”, about 40 feet above MSL).

The homeowner cited in the story has been flooded out three times in twelve years. Maybe the house shouldn’t be rebuilt (as happened along the Mississippi after the 1990s floods—you got a payment but only if you DIDN’T rebuild in the flood plain).

I don’t know where that puts buildings like mine (the first floor is all commercial, the residential floors are ~30 feet or higher). A flood that high is likely to have wiped out much of the NYC area. Rebuilding & flood insurance will be the least of my concerns in that scenario.

Posted by epc | Report as abusive

I lean toward Taurabora’s explanation, and more generally toward the fact that people in floodplains aren’t a random 5% of the population, but are concentrated in districts where it really, really matters to the politicians to protect them.

I’d also posit some Republican obstruction based on the practice of labeling any money paid to any government-related agency for any reason a “tax” that is not to be raised for any reason. This, like the first paragraph, is largely speculation on my part, though.

Posted by dWj | Report as abusive

Well, raising rates would have a huge effect on a non-trivial fraction of real-estate values.

IF in a FEMA flood map, most mortgage issuers require flood insurance. So in places where it is actually needed, it is a de-facto required product. And it can easily double or triple the cost of insurance on a property even with the huge federal subsidy. (Thus, eg, when I was buying, I looked at the local area flood maps to avoid any property in the flood zones).

Thus the 5% figure is actually distressingly high, not distressingly low: it suggests that >5% of the houses are in places where they shouldn’t have been built!

If flood insurance rates double, then the property in designated flood zones would have to drop in value to accommodate the multi-hundred-dollar per month additional cost.

Posted by NicholasWeaver | Report as abusive

Beach front stuff, my boy! Take a train ride and look at Fairfield County: 50 years ago the houses on those beaches were hand-hewn shacks made by ordinary numbskulls. They sat on pilings, and the idea was that when (not if, when!) they got blown down and washed away, so what? just get some pallets and scrap wood and build ‘em again in two sweaty weekends. Today practically every one of ‘em’s a mansion, from Greenwich all the way to Milford. How’d it happen? Federal flood insurance. It used to be the best hidden transfer payment from poor slobs to the super-rich. Now it’s merely one of many.

Posted by edwardericsonjr | Report as abusive

Yes, sure, it would be so much better if AIG ran the flood program, right? You need to do a little research. The reason NFIP is $21 billion in debt is because there was too damn much flooding in Louisiana from Hurricane Katrina because of the catastrophic failure of the levee system and because of decades of coastal erosion that eliminated the land and marsh that protected Greater New Orleans. Even if the premiums were higher, there would not have been $17 billion sitting there to pay for the failure of the levees. The premiums were based on the risk behind levees. If private insurers had provided flood insurance in New Orleans, even at much higher premiums, they would have refused to pay the claims and would have demanded that the federal government pay for the flooding caused by levee failures. Then they would have blackmailed the federal government to either take over flood insurance or give them a sweet federal backstop that would have allowed them to collect and keep the premiums but left taxpayers with the risk for catastrophic claims. Did you know that the insurance companies that contract with NFIP get to keep 30% of the premiums off the top and then another generous subsidy when they adjust flood claims, even though GAO and CBO have both said these are windfall that exceeds their actual administrative costs by at least 20%?

Posted by jbmdc | Report as abusive

My home was built in 1870. It has never flooded and wasn’t considered in a flood plain until FEMA reworked the maps. Now a contour line catches the corner of my house and I have to pay an extra $100 per month for FEMA’s flood insurance. The house is not within five miles of a river or body of water. I feel so much safer knowing I have flood insurance coverage. I think FEMA should require every property owner in the nation to carry flood insurance. That way there’s no issue and we’ll all be saved by our government. I wish I had some swamp land to sell.

Posted by pcFarmer | Report as abusive

Oh, and by the way I’m in the hurricane and flood prone region of central Ohio.

Posted by pcFarmer | Report as abusive

Anywhere near Marion County, pcFarmer?

http://www2.nbc4i.com/weather/2011/mar/0 5/flooding-central-ohio-ar-414531/

Does sound like your situation is borderline, though.

Posted by TFF | Report as abusive