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Drowning in Risk

Original Illustration by Peishan Yu

A small house in Spring, Texas, worth $42,000, flooded 19 times due to heavy rain. The National Flood Insurance Program (NFIP) covered repairs for each of those floods, costing a whopping $912,732—over 20 times the value of the house itself. About three-fourths of Americans living in high-risk areas have purchased flood insurance policies, the majority of which are provided by the government. However, the NFIP does not necessarily provide cheaper or better policies; the government dominates insurance claims below its $250,000 coverage cap due to a noncompete clause restraining private insurers. In response, a coalition of diverse stakeholders has called on the government to increase competition in the flood insurance market. 

As climate change aggravates natural disasters, rates of repeated home floods are rising. Thirty houses in the United States have flooded at least 30 times, and 214,000 homes had flooded repeatedly in 2018—an increase of 64,000 since 2009. Motivated more by their bottom lines than by helping American homeowners, private flood insurance companies would refuse to cover high-risk areas, even if granted a larger corner of the market. Increasing competition is, therefore, only a partial solution to the flood insurance crisis. The NFIP must instead raise its coverage cap and resolve its current inefficiencies to ensure that Americans can survive the sea change of climate change.

The World Economic Forum’s 2024 Global Risk Report ranks “extreme weather events” as the top international risk within the next 10 years. The National Oceanic and Atmospheric Administration calculated that the cost of climate-related disasters last year totaled an astounding $165 billion. Without necessary investments in climate change mitigation, these costs will be much higher in the future. 

Private companies are ill-equipped to handle rising risk levels, burdening households with spiking rate premiums or refusing to insure certain areas entirely. Homeowners insurance companies—which are distinct from flood insurers—provide a useful example of this phenomenon. For instance, several homeowners insurance companies have simply stopped offering new policies in Florida out of trepidation for rising sea levels. Other companies have tried skirting financial risk by raising their premium rates in proportion to hurricane and other natural disaster risks. In January, the North Carolina Rate Bureau asked the state’s Department of Insurance to approve enormous rate increases, averaging 42 percent statewide and going up to an excessive 99 percent in coastal counties. If private companies were to gain greater access to the flood insurance market, the same would likely happen. And, because a $500 flood insurance premium rate hike can reduce a home’s market value by $10,000, excess flood risk eats away at equity. Homeowners in high-risk areas might alternatively lose private coverage entirely.

While introducing private competition into the flood insurance market would not be a calamity, it would not be a cure-all, either. With the prevalence of repeated flooding on the upswing, private companies would likely fail to insure the Americans who need it most. The solution, requiring long-term foresight, rests in the public sector. Now more than ever, the American insurance system needs to be restructured, and a larger federal disaster response and prevention approach must be implemented. Together, these two policy changes are critical to our nation’s success in mitigating the impacts of natural disasters and rising sea levels. 

The NFIP’s repeated home rebuilds, like those in Spring, Texas, are just one example of the inefficiencies plaguing the program. It is therefore unsurprising that the NFIP is $21 billion in debt to the Department of the Treasury. The program allocates too many resources to rebuilding property when it should be incentivizing homeowners in flood-prone areas to preemptively relocate. Alarmingly, only $1.72 of every $100 that the Federal Emergency Management Agency (FEMA) spends goes to relocation efforts, according to the National Resource Defence Council. In Rhode Island, FEMA granted $5.5 billion in total aid over 30 years with the hope of relocating homeowners, but the majority of that funding was diverted for repeated rebuilds. 

It is time for the NFIP and FEMA alike to be organizationally proactive. The NFIP’s current preventative measures, though insufficiently implemented, have been successful: Constructing flood maps and building floodplain mitigation projects save the program $1.6 billion annually in potential losses. Over the next 50 years, FEMA hopes to grow significantly, claiming that it will “quadruple the amount invested in mitigation.” 

Throwing money down the drain by repairing the damage caused by a Texas basement’s annual floods—with the water reaching higher each time—simply isn’t the solution. But, neither is leaving Americans high and dry without any insurance or plan to prepare for the burgeoning natural disasters threatening their homes. Climate change’s effects on the housing market represent not merely a pressing risk, but more importantly, an opportunity to take massive federal steps toward acclimating to the new environmental reality.