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FEMA wants Congress to make flood insurance more affordable

For people living in flood-prone areas, there is a large income gap between those who hold insurance policies and those that don't.

Hurricane Harvey in August 2017 caused devastating flooding in Texas. (Credit: Scott Olson/Getty Images)
Hurricane Harvey in August 2017 caused devastating flooding in Texas. (Credit: Scott Olson/Getty Images)

In an unprecedented move, the Federal Emergency Management Agency (FEMA) is asking Congress to make national flood insurance more affordable, in a new report released Tuesday.

People “face critical tradeoffs between purchasing flood insurance and basic necessities,” the report states. As FEMA described in its press release, the study “suggests that both policyholders and non-policyholders with the lowest median incomes live in the highest hazard areas.”

The landmark study lays out several options for policymakers to consider in an effort to increase the number of people who can afford coverage and help shield low-income homeowners from increasing insurance rates.

If Congress adopts any of the recommendations in FEMA’s report, it would be a shift away from the agency’s existing practice of providing insurance discounts based on factors such as the age of a building’s construction and when a flood map went into effect.

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Administered by FEMA, the National Flood Insurance Program (NFIP) is a voluntary program that allows homeowners to buy flood insurance (which typically isn’t covered by other forms of property insurance). NFIP, however, is currently $20.5 billion dollars in debt and is set to expire on July 31.

The significant scale of debt is due to a combination of factors. This includes not charging rates that actually reflect the risk associated with building homes in floodplains. Added to this is the series of devastating flood events experienced in recent years — due to Hurricane Harvey last August, 2017 was second largest loss year in the program’s history. This is then followed by the fact that flood insurance goes more toward rebuilding in flood-prone areas rather than relocating to safer regions, meaning more exposure to floods in the future. 

Recently, FEMA has announced a series of efforts to deal with NFIP’s financial struggles, including issuing a catastrophe bond designed to raise money to insure future catastrophes such as hurricanes or earthquakes. This would be the first ever such bond to cover flood damages. NFIP is also turning more to private companies to help secure over a billion dollars in reinsurance coverage.

The agency will also be increasing its flood insurance premium by about 8 percent in the coming year — the average premium is estimated to go from $866 to $935. 

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The combination of higher flood insurance premiums, however, combined with the the number of low-income households living in flood-prone areas, “creates affordability pressure,” Tuesday’s report states.

The report finds that for people living in areas at high-risk of flooding, there is a large income gap between those who hold NFIP insurance policies and those that don’t.

According to the study’s findings — which draws heavily on Census data — 51 percent of those who don’t have flood insurance, but live in areas deemed “high risk” to flooding, are low-income households. These are defined as households with income below 80 percent of an area’s median income — the point halfway between the lowest and highest incomes. This allows for regional differences in average incomes to be taken into account.

Among those that do have flood insurance, a quarter are low-income homeowners. As the report states, “Policyholders tend to have higher incomes than households that currently do not carry flood insurance.”

Flooding is one of the most common environmental damages to households, and with climate change, it is expected to become increasingly devastating. Hurricane Harvey was precisely so damaging because of the amount of flooding experienced. However, many Texas residents impacted by Harvey failed to buy NFIP coverage, or let their policies lapse, according to a New York Times report.

FEMA proposed four different options to members of Congress to help alleviate pressure on low-income households. Three of these models would help subsidize households that can’t afford to pay the premiums. But as the report notes, while these would help “reduce the burden of flood insurance premiums for policyholders, they will not change the physical flood risk borne by individual policyholders or the nation as a whole.”

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A fourth option seeks to target mitigation grants and loans. It would focus on helping to cover large up-front costs required to undertake flood mitigation efforts such as elevating individual homes or pursuing community-level infrastructure improvements. Undertaking these efforts could then help reduce a home’s future insurance premiums. While this could be a stand-alone program, FEMA recommends that this model be added to one of the other three options proposed in the report.

FEMA states that its efforts to “close the insurance gap” are part of its larger strategic plan, which was released last month. The plan, which covers the next four years, states that “Disaster costs are expected to continue to increase due to rising natural hazard risk, decaying critical infrastructure, and economic pressures that limit investments in risk resilience.” What it doesn’t mention, however, are the words “climate change.”