Is Flood Insurance Too Expensive?

The news has routinely profiled homeowners bemoaning the costs of flood insurance or citing annual premiums that are certainly cringe-worthy.  Over the last several years there has been concern about the affordability of flood insurance.  It is necessary to realize, however, that there are really two separate discussions in this debate: (1) Does paying for flood insurance create financial hardship for a family? (2) Do families think flood insurance is just not worth it?

The National Flood Insurance Program (NFIP), housed in the Federal Emergency Management Agency, provides the vast majority of flood insurance to households nationwide.  Properties in a mapped high risk area with a loan from a federally backed or regulated lender must purchase flood insurance. The program is up for reauthorization in less than a year and Congress is considering potential reforms. The issue of how much flood insurance costs has been a driver of congressional decisions about the NFIP not just in recent years, but since the program’s founding.

The first discussion is a concern for low-income households who would like to purchase, or are required to purchase, flood insurance but would struggle financially to afford it. There is emerging consensus that these households could benefit from a targeted financial assistance program. Disaster aid is insufficient to help them rebuild and the unexpected costs of repair can create serious financial hardship.

Any assistance program for low-income families would likely require transfers of tax dollars. It should be a sliding scale based on income (and possibly wealth), to reflect ability to pay.  A program for low-income renters could be designed for contents coverage. To the extent these properties could benefit from risk reducing measures, which might also lower their insurance costs, they could also receive flood mitigation assistance. 

A different “affordability” concern is that many households that could afford to buy flood insurance simply don’t see the value in it; they think it is “not worth it.”  Lower prices might encourage these individuals to buy a policy, but the failure to buy flood insurance depends on more than its price.

First is risk awareness and knowledge.  Many people in areas at risk of flooding dismiss the risk, think it is lower than it is, or don’t appreciate the extent of damage flooding can cause. There can also be confusion about sources of flooding. Intense precipitation events can overwhelm drainage systems, for example, causing flooding in areas removed from rivers and coasts. During dry times, many people fail to appreciate that flooding is actually possible. And while FEMA flood maps let people know if they are “in or out” of high hazard areas, they do little to explain the gradations of flood risk and how flood risk continues past the 100-year floodplain line.

Second, there is also often a misunderstanding about the purpose of insurance. The best payoff on an insurance policy is never having to use it! But should damage occur, insurance provides invaluable financial protection. This can prevent families from having to unexpectedly deplete savings accounts to rebuild or cut back on other expenditures to finance rebuilding.

Third, many people at-risk may not realize that federal disaster aid for households is actually quite limited. FEMA disaster aid grants only average around a few thousand dollars and are only to make a home safe, not bring it back to pre-disaster conditions. And the first line of federal assistance for families is actually a loan, not free money. To rebuild back in the manner most families would want, they need an insurance policy. This may not be widely appreciated. 

Finally, the value proposition of flood insurance also relates to the nature of the product. Some policyholders may want coverage that the NFIP does not offer: expanded coverage in basements or coverage for alternative housing if flood waters force them from their homes. A private market may be able to offer additional products that better meet the needs of some homeowners.

Addressing the “is it worth it” question of flood insurance thus requires fundamentally different approaches than solving the “can we afford it” problem. It requires improving our outreach to households about the risk, moving beyond the simple messaging now given to residents of flood-prone areas. It requires discussions about what insurance is and is not and about the limitations of federal disaster aid.  Politicians who promise disaster victims unlimited help do everyone a dis-service when households find that the reality of federal aid is much harsher. And finally, it may require developing creative new types of disaster insurance products based on the desires of those living in our nation's floodplains.

This article was originally published by The Hill.