In the wake of historic flooding in the Lower Mississippi River, the House Financial Services Committee approved a bill on Friday that would raise insurance rates from the National Flood Insurance Program (NFIP) to better reflect actual flooding risks, what some are saying is an important step to adapt the NFIP to the effects of climate change. According to the bill, the program will raise the program’s rates 20 percent annually to market-based levels.
With the massive flooding along the Mississippi River and major floods in the Red River Basin in the Upper Midwest, over the past few months, it is not surprising that the bill passed in the Committee unanimously. By adjusting premiums to reflect risks, the program will provide homeowners signals about the hazards of living in high-risk areas and encourage them to invest in cost-effective mitigation measures to reduce vulnerability to catastrophes.
There still is a long way to go to effectively prepare the NFIP for the challenges of adapting to climate change. RFF released an Issue Brief Encouraging Adaptation to Climate Change: Long-Term Flood Insurance - which will be a part of a broader adaptation report that is set for release in June – outlining further steps the National Flood Insurance Program and Congress can take to implementing policy that better reflects the effects of climate change.
Highlights from the Issue Brief are below:
“We recommend that Congress and the Administration revise the 1968‐established National Flood Insurance Program (NFIP), which covers more than $1.2 trillion of assets today, by moving from annual insurance contracts to long‐term policies tied to property. Such a change will encourage people in high risk areas to think more about the long‐term and invest in cost‐effective adaptation measures that reduce losses from future floods and hurricanes.”
“One‐year flood policies are problematic because many people buy the insurance when they get a mortgage or immediately after a flood, but do not keep the coverage for the long term… As a result of these cancellations, there are likely to be a large number of uninsured victims after the next flooding disaster…we propose that consideration be given to long‐term flood insurance (LTFI). By tying policies to the length of the mortgage (10, 20, 30 years), insurance will be directly linked to the property. A further step would be to require that all properties in flood‐prone areas have coverage, just as auto insurance is required on all vehicles. When a resident moves to another location, the flood insurance policy would remain with the property.”
“The evidence on increasing losses from disasters, notably floods and hurricanes, indicates that the current structure of the National Flood Insurance Program is not adequate to cover truly catastrophic floods. It is also somewhat limited in achieving its twin objectives of reducing property losses from future disasters and providing protection to those who suffer severe water damage for a simple reason: many of these residents do not invest in risk‐reduction measures voluntarily and cancel their flood insurance coverage if they haven’t suffered a loss for several years.“
“The flood insurance program should combine the strengths of the public and private sectors and take into account how people make decisions so that proposed solutions will be considered as win‐win propositions by the key interested parties.. In designing these programs, one needs to understand how a long‐term insurance policy with rates reflecting risk can lead property owners to invest in loss reduction measures when the insurance is coupled with long‐term home improvement loans and building codes.”
The full Issue Brief is available on our website here.
