Why the government's flood insurance program is underwater

0:01NPR.

0:11This is The Indicator from Planet Money. I'm Paddy Hirsch. And I'm Waylon Wong. We've been hearing a lot about flooding in the news lately, catastrophic floods in Spain, and closer to home this week, tropical storms and heavy rains are soaking Louisiana, Southeast Texas, Missouri, and Oklahoma. Insurance isn't the first thing that comes to mind when you're anticipating a flood, but American homeowners who do check their home insurance policies will almost certainly find that they are not covered. That's because most insurers in the U.S. do not cover flood. In fact, pretty much the only place you can get flood coverage is from the government, through the NFIP, the National Flood Insurance Program.

0:51Because it's basically the only game in town, you would think the NFIP would be going gangbusters. But the program is not doing well. The NFIP frequently runs out of money and has to ask Congress for a loan. The result is that the American taxpayer is increasingly on the hook for payments to flooded homeowners. On today's show, we'll find out why that is and learn why the National Flood Insurance Program is struggling.

1:39providing unprecedented access to The Economist journalists. Twice Weekly Shows will feature in-depth debates and discussions with The Economist senior editors as they share expertise and analysis to make sense of an increasingly complex and dangerous world. More at economist.com slash insider. This message comes from the Hartford. Every day, they create unique risk solutions for unique businesses. They understand the challenges businesses face today and are ready to anticipate the risks of tomorrow. Their teams know the ins and outs of specific industries, so the Hartford can help provide insurance solutions for midsize and large businesses.

2:19If a business needs it, chances are they've got it and get it. Connect with your underwriter at the Hartford or visit thehartford.com. Flooding has become something of a fact of life for the people who live close to the Winooski River, which runs alongside the town of Waterbury in Vermont. It flooded in July 2023. It flooded in December 2023. And then it flooded again in July of this past year. This is Ben Ayers. His house was built by his great-great-grandfather in downtown Waterbury in 1892. Back then, the Winooski River didn't flood that often. The first big flood in Waterbury happened in 1927.

3:00Water backed up into the town and it was 12 to 15 feet deep. And there's a story of my grandfather as a 10-year-old child going out of the second story windows in a rowboat to escape to safety. And you'd think that this experience might have convinced Ben's grandfather to get flood insurance for his house. But no. You know, my grandfather didn't believe in it. He saved money, had a bank account that he set aside, put money into, thinking that it would be a better deal for him to self-insure. The fact is, though, that if Grandpa Ayers had wanted to get insurance from a regular insurance company, he wouldn't have been able to get it.

3:37Yeah, that's because 1927 was also the year of the Great Mississippi River flood. It caused so much damage and cost insurance companies so much money that insurers stopped offering flood coverage to homeowners almost altogether. Carolyn Kuske is the chief economist of the Environmental Defense Fund, an advocacy organization. The private sector doesn't want to offer flood. They've had lots of opportunities to provide flood insurance and they're not interested. It's too risky. For nearly 40 years, it was almost impossible to buy flood insurance for your house. And then in September 1965, a strong hurricane barreled across the Florida Keys into the Gulf of Mexico, where it hammered the Louisiana coastline.

4:17They called that storm Billion Dollar Betsy. because it cost$1.42 billion in damages. Because no one was insured, a lot of that money was paid out to flooded homeowners by the government in the form of disaster relief. And it convinced Congress that if the insurance companies weren't going to provide flood insurance, the government was going to have to. And thus, the National Flood Insurance Program was born. It was designed as a voluntary program. Communities opt in. And when they opt in, they have to adopt minimum floodplain management regulations in the FEMA-mapped floodplain. And then in exchange, all of their residents become eligible to purchase flood insurance through the program.

4:57The idea was that municipal governments would vote to join the program and existing residents could buy insurance from the program at subsidized rates. New residents, however, had to pay risk-based rates, which were a lot more expensive. Meanwhile, those local governments agreed to a set of development rules. The rules were designed to either dissuade governments from building in flood-prone areas or to push them to build in ways that limited damage from flooding, but were a lot more expensive to implement. In other words, the rules took aim at both the supply and the demand side of the housing equation in flood zones.

5:31The idea was to stop or slow development in these areas so that the government wouldn't have to come and spend billions of dollars in aid every time there was a flood. But there was a problem with this plan. In fact, there were three big problems. The first, those maps that FEMA is supposed to provide, identifying flood risk areas. Yeah, those maps are very expensive and they take a very long time to make, years in some cases. And often, by the time that they're finished and distributed, they don't reflect changes that have been made in the interim in infrastructure and topography on the ground.

6:03What's more, Carolyn says, they often don't reflect all of the risks associated with the changes in North America's climate. They do not include flood risk from intense precipitation events. And climate change is making intense rainfall more severe and frequent in many parts of the country. And lots of people that are now experiencing that rainfall-related flooding aren't aware, didn't have flood insurance. The second problem that the National Flood Insurance Program has had to contend with, low sign-up rates. Nobody likes to buy insurance. Nobody likes to think about bad things happening or purchase something they hope to never use.

6:39Yeah, when the NFIP launched back in the late 60s, it was kind of a flop. For one thing, communities didn't opt in in large numbers. And even when they did, residents of those communities simply didn't buy the insurance. And as we've talked about on this show before, insurance programs can only function if there's a large pool of policyholders whose premiums are used to make payouts in the event of a disaster. It took until the mid-1970s for the NFIP to get any momentum. Today, it covers about 5 million properties. That may sound good, but it's still not enough to sustain the program. And then there's the third problem.

7:15All of those incentives to dissuade cities and developers from building on flood-risky land? Well, they didn't work. Oversight of the communities who signed up was sketchy, and development went on regardless of the risk. Carolyn says this shouldn't really be a surprise. Unfortunately, we have a lot of misaligned incentives. Developers don't hold on to the risk long term. They just pass it off. So they have every incentive to just build a lot of risky stuff because somebody else is going to pay the costs. Same with local governments. They don't hold the bill later, but they get the property tax revenue when it's safe.

7:50So not making risk-informed choices. All of this, the low sign-up rate, the patchy enforcement, the issues with mapping, it might not add up to a problem if there weren't too many flooding events to contend with. And for a while there, in the 70s to the 90s, there weren't. And then in 2005, Hurricane Katrina hit. Then Rita. Then Wilma. The NFIP had to handle so many claims that it just plain ran out of money. If it was a private insurance company, it would have gone bust. Instead, it tapped the government for billions of dollars in loans. Since then, over the last 20 years, there have been so many flooding events that the NFIP has gone back to the federal well again and again.

8:32The NFIP has been billions of dollars in debt going back to Hurricane Katrina in 2005. In 2017, after Hurricane Harvey, instead of sending the program into even deeper debt, Congress forgave$16 billion of NFIP loans. But the program still owes around$20 billion. In the years since then, many stakeholders have all made very clear that FEMA is never going to be able to repay this debt on its own, and the interest costs are adding to the cost of flood insurance for policyholders. Now, it's not as though Congress isn't aware of this problem. There was an attempt in 2012 to reform the NFIP. But the suggested changes involved increases in premiums.

9:11And no politician wants to support a measure that's going to raise costs for their constituents. So the reform was reversed. There are other solutions to reduce flood risk to homeowners. For example, FEMA offers support to municipalities to buy out flooded homes so that people can relocate. But in Waterbury, Vermont, Ben Ayres has seen how skewed incentives can derail initiatives like that. After the floods of last July, FEMA came back in and offered buyouts for people. But the town was very reluctant to approve any buyouts because they didn't want to lose the housing stock. And so there's a way where we're sort of trapped.

9:47Well, not that Ben minds being trapped in Waterbury. He loves the town and he loves his home. which is why, unlike his granddad, he bought flood insurance through the NFIP. Our deductible is about$5 ,000 and we pay about$4 ,000 something a year for the policy. That is not cheap. No, it's not cheap, but Ben says it is reasonable given the risk. This episode was produced by Julia Ritchie with engineering by Kweisi Lee with fact-checked by Sierra Juarez and edited by Keith and Cannon. The Indigators are production of NPR.

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