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Housing Perspectives

Research, trends, and perspective from the Harvard Joint Center for Housing Studies

How Do We Encourage Greater Flood Insurance in America?

The National Flood Insurance Program (NFIP) has faced numerous hurdles since its creation in 1968, not the least of which was the increasingly poor mismatch between its policy rates and actuarial risks, leading to the program’s financial stumbling after the severe flood events of recent history. The passage of reforms in 2012 and 2014, along with FEMA’s consequent Risk Rating 2.0 efforts, have improved the program’s ability to reflect flood risk more accurately, but they have also foregrounded affordability and access concerns. Current estimates show that there are well over 4 million homes at substantial flood risk including from the long-term impacts of climate change. All tools, including property flood insurance, must be at the ready.

As I testified this morning in a Congressional Subcommittee hearing on Housing and Insurance, there are six fundamental challenges to the widespread adoption of flood insurance, each of which provides an opportunity for federal intervention.

  1. Unaffordability is the first and most salient challenge to increased take-up. The creation of a well-designed, means-tested assistance program for low-valued, high-vulnerability properties could more effectively and efficiently target the households burdened by the rate increases necessary for NFIP’s financial soundness as well as the expansion of the marketplace for any provider.
  2. Most consumers have limited awareness of their actual flood risks and may not see the need to purchase flood insurance if it is not required. Highly vulnerable groups, such as renters, have little to no information or support for their decisions. Increased disclosures and user-friendly information  repositories would ensure that households have at least basic information to make informed decisions.
  3. Institutions that require flood insurance, such as federally backed mortgages, may not have clear, consistent, and enforced requirements, especially for future flood risks that are increasingly material to homeowner exposures but not integrated into the terms of existing 30-year or other mortgages. Requiring updates and monitoring of the range of consumer financial products for which flood risk is relevant could lead to immediate and increased take-up.
  4. Consumers are largely unclear about their individual insurance coverage. Accessible coverage and premium information across public and private insurance policies and providers, including unambiguous language between homeowner and flood policies in the form of an insured’s “bill of rights,” could increase homeowners’ awareness of the gaps in their coverage and lead to the purchase of more flood policies.
  5. We have massively underfunded structural mitigation for floods at both the property and infrastructure levels, including thoughtful buyouts for severe-repetitive loss properties. Expansion of resources to federal mitigation programs for properties and communities in FEMA, HUD, and the Army Corps, particularly for the most vulnerable, would reduce risks and make the expansion of flood insurance sounder for the range of providers.
  6. Finally, the lack of transparent data on properties, property owners, and their respective policies prohibits a sound assessment between insurance provider types, the effects of public policy on insurance take-up, and a host of other critical indicators. Open data are also necessary to measure disparities between policyholders by price, coverage, and treatment, necessary evidence for ensuring that federal decisions are leading to fair, efficient, and effective outcomes. Centralized national reporting requirements, akin to mortgage disclosure data, is needed for monitoring, evaluation, and corollary research.

Given the challenges associated with growing flood hazards and the unique role the federal government has played in preparing and mitigating homes for them, Congress and the Federal Insurance and Mitigation Administration within FEMA must address these opportunities soon. As our forthcoming Improving America’s Housing 2023 report will show, households are facing expenditures for disaster repairs at alarming rates, spending $18 billion in 2021 alone.

We are living in a moment when the unwritten contract between insurers and government is being extensively rewritten. Over one hundred years ago, private insurers stopped issuing fire policies because of great urban fires. In the 1920s, private insurers stopped issuing flood policies after the great disasters along the Mississippi River, which led to the creation of the NFIP in 1968. Expanding flood insurance to more households whose properties and communities are vulnerable is a laudable and necessary goal. But we should tread carefully when designing federal policy precedents, lest we find ourselves in a position similar to 1968.