Flood Insurance: NFIP is aligning rates better with risk, why not their flood maps? 

As was brought to light once again by the nightmare that was Hurricane Ian, America’s flood insurance system is in trouble. The remedy to our collective and multifaceted problem will not be found in relying on big government “fixes” like the National Flood Insurance Program (NFIP). The solution will be found in focusing on the curative power of consumer choice to efficiently determine allocation of resources to produce fair, durable, cost-effective and socially responsible flood insurance outcomes.  

The government, which administers the NFIP through the Federal Emergency Management Administration (FEMA) is making an effort, but it is not enough. It may be too little, but it’s not too late to do more to ensure that many more Americans have good flood insurance coverage and that American taxpayers aren’t footing the bill for underpriced flood insurance and  repetitive loss properties.  

With its new risk assessment system, Risk Rating 2.0, FEMA is using updated methods to  generate more accurate rates that better align the cost of flood insurance with risk. They are now employing geocoding that has been used by the private flood insurance market for years. Where the NFIP used shape files on the maps to assign rates randomly, they could have been using a pin drop approach to low-lying structures across the U.S., like the private market was. This new rating system uses that approach and is a step in the right direction — though it has flaws. However, it begs the question: If the NFIP can use geospatial technology to calculate rates that more accurately line up with flood risk, why doesn’t the NFIP replace its horizontal maps with geospatially determined vertical-oriented flood maps that identify buildings severely exposed to flooding? This would expand the flood plain maps to include millions of additional structures. Further, this approach would allow property owners to better understand a property’s flood risk at the time of purchase. 

Ill-prepared and Under-insured 

Sadly, the dearth of flood insurance for Ian’s victims is the new normal. The victims in the Fort Myers area were ill-prepared for Ian and the vast majority of homeowners were uninsured or under-insured for the damage caused by flood waters that wreaked havoc on their communities. CNN reported Ian could cost homeowners as much as $17 billion in uninsured losses. Further, only about 25 percent of homes in Lee County, which some might say took the brunt of the storm, had federal flood insurance, while neighboring inland counties, which also suffered significant flood damage, had a federal flood insurance uptake of only 2 percent - 4 percent. 

Many people assume that FEMA has been effective in outlining low-lying areas in the 100-year flood zone. However, geospatial specialists agree that about half of the structures in the U.S. that should be included in the Special Flood Hazard Area (SFHA) are not.  

Now, under Risk Rating 2.0, many homeowners, mostly found in locations that the NFIP does not include in the SFHA maps, are experiencing dramatic NFIP rate increases. Some are abandoning coverage as a result. This is a tragedy when many could likely find more options for this much-needed coverage in the private market. This is also ironic as many of these properties would be considered in flood zones if the NFIP were to update its maps. Meanwhile, other policyholders, whose properties are located in NFIP flood zones – where flood coverage is mandatory if the structure has a mortgage and where the flood risk is officially designated as being more severe – are experiencing artificially low rates instead of the correct NFIP Risk Rating 2.0 rate. 

Inaccurate Rates Disadvantage Policyholders, Taxpayers  

In March 2014, Congress charged FEMA to raise NFIP rates for most structures by at least 5 percent per year, but not more than 18 percent with some exceptions.  

Partnering with Guidewire Software’s Hazard Hub team, Poulton Associates, LLC found the NFIP has not only failed to raise rates as directed by Congress, it is actually charging a lower average rate today than it did in 2010. The NFIP average annual rate trended down 9 percent from 2014 to 2019. Average rates come to just nearly half of what would be needed to cover claims costs during that period and never even approached the 5 percent minimum increase instructed by Congress – all while the NFIP has continued to borrow from the U.S. Treasury and has received more than $16 billion in debt forgiveness. 

Unfortunately, the NFIP has designed Risk Rating 2.0 to continue charging inadequate average annual rates for years to come. Under this plan, after five years, actuarily defensible rates will reach only about 50 percent of NFIP policyholders.  

Though more accurate rates would help enlarge private market flood insurance uptake, the NFIP’s refusal to return unearned premiums to a consumer if they cancel and rewrite coverage in the private market discourages free choice. Unlike private insurers, the NFIP keeps 100 percent of any unearned premium if the policy is replaced at any time other than the renewal date of the policy.  

Now is the Time to Act 

As Congress and FEMA reexamine flood insurance in the wake of Hurricane Ian, they should direct the NFIP to use their new risk assessment methods to update their flood maps to open America’s eyes to a more accurate view of flood risk. Further, they should direct the NFIP to reduce barriers that limit consumer access to the private flood insurance market focusing on: 

• Implementing faster Risk Rating 2.0 rate increases to protect taxpayers and stimulate competition. 
• Doing away with the NFIP mid-term cancellation rule limiting consumer choice. 

With a greater focus on common sense solutions such as more complete flood maps, rate adequacy and consumer choice, the NFIP can work in tandem with the private market toward a more sustainable flood insurance future.  

Craig Poulton (cpoulton@poulton.com) is chief executive officer of Salt Lake City-based Poulton Associates, LLC, which administers various catastrophe-related insurance products, including the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATCoverage.com.