Flood insurance quagmire demands bold reform, not stopgaps

The National Flood Insurance Program — the federal money pit that created perverse incentives to own property in areas most susceptible to climate change — is set to expire again on Sept. 30. Unfortunately, policyholders and taxpayers have grown numb to the drama of such deadlines because Congress has been continually renewing the program through short-term, kick-the-can-down-the-road extensions since 2017. Lawmakers should push for meaningful change that will nudge society toward more resilient communities and equitably distribute the burden of adapting to climate change.

The program, which is managed by the Federal Emergency Management Agency, is the primary source of flood insurance for about 5 million U.S. policyholders and plays a critical role in many coastal real estate markets. But the five-decade-old program has been slow to adapt to climate change, and — although it was never designed to function as a for-profit enterprise — it has hemorrhaged money at an unsustainable rate. Because most of its policies fail to fully account for risk, it typically turns to the Treasury to borrow money after weather catastrophes.

In 2017 — after a busy hurricane season that included Harvey, Irma and Maria — Congress had to cancel $16 billion of the program's debt. A new pricing methodology has begun to address the problems, but the premium shortfall will take decades to close, and lawmakers must be proactive in tackling the mess. While policymakers may need another extension first to prevent the havoc of the program's expiration, they must ultimately move toward longer-term solutions.

First, Congress should end premium subsidies for high-earning households as soon as possible. Current rules allow for subsidized rates on hundreds of thousands of properties regardless of income. Those include homes that were built before 1974; have recently been mapped into Special Flood Hazard Areas; or were built before the first Flood Insurance Rate Map was published for their areas. In many cases, these subsidies end up benefiting millionaires. who don't need them. In the most egregious examples, the incentives may actually be enabling homeowners who would otherwise steer clear of high-risk areas vulnerable to sea level rise and increasingly severe storms.

Fortunately, in 2021, FEMA began moving away from subsidization and toward a model based on property-specific risk,. a change dubbed Risk Rating 2.0. But by statute, premium increases are capped for most primary residences at 18% a year, which means it could take close to two decades for some homeowners to pay rates consistent with true risk. In the meantime, the money-losing program could incur billions of dollars in additional debt, and its existence — in its current form — will dull any sense of urgency around climate migration. The perpetuation of unnecessary subsidies also undermines would-be players in private-sector flood insurance. Policyholders also pay fees and subsidies, which nominally aren't part of their premiums but form a significant part of their overall flood insurance bill. These, too, should be better aligned with property risk.

Second, any further subsidization of future fees and premiums should depend on income and need. While it's true that rich families benefit from artificial caps on flood insurance premiums (those in South Florida's millionaire enclaves, for example), so, too, do many poor and working-class families. (those in the coastal Louisiana wetlands, for instance), as researchers V. Kerry Smith and Ben Whitmore found in their paper "Amenities, Risk, and Flood Insurance Reform." For the former, the subsidies may be having the perverse effect of encouraging home purchases in areas vulnerable to climate change. But in places such as Louisiana, the discounted rates are simply keeping American families sheltered and solvent. Policymakers should study a variety of formulas for need-based subsidies, including offering them to those for whom total housing costs exceed a certain ratio of household income.

Doing so isn't just the ethical choice; it's also fundamental to the broader success of the program. Faced with higher rates, some low-income homeowners may simply forgo insurance, as has already happened in some instances under Risk Rating 2.0. That will end poorly for the government and many property owners and renters. A key goal of the NFIP is to attract more policyholders to better diversify its risk and increase premium income. If fewer people are insured, federal emergency spending would be that much greater after a catastrophe.

Third, FEMA must update its official flood maps quickly. Risk Rating 2.0 updated the methodology used for insurance pricing, but Decisions on which homeowners must carry flood insurance still hinge on the old maps, which also help dictate building standards. They generally look backward, fail to account for flooding caused by heavy rainfall and neglect to consider the many forward-looking impacts of climate change. Sadly, shortsighted politicians often hijack the mapping process, maneuvering to block maps that might bring higher insurance costs to their communities. State and local community leaders should instead take the long view and become advocates for transparent and up-to-date maps.

Like other forms of climate adaptation, changes to the National Flood Insurance Program have always been politically complex. Congress made sweeping and important changes to the program under the Biggert-Waters Flood Insurance Reform Act of 2012, but the pushback was so fierce that they ended up blunting the package soon afterward with the Homeowner Flood Insurance Affordability Act, signed into law by President Barack Obama in 2014.

No one's saying it will be easier this time around. Indeed, with mortgage rates near the highest in more than two decades, many homeowners and industry stakeholders think it's a perilous time for an effective increase in flood insurance premiums. Maybe so. But lawmakers must ask themselves, "If not now, then when?" Congress's unwillingness to make difficult choices around climate adaptation are only going to make these challenges that much greater a few years down the line.

This guest essay reflects the views of Jonathan Levin, who wrote this for Bloomberg Opinion.