clock menu more-arrow no yes

Filed under:

Flood insurance is broken

New, 1 comment

Hurricane Florence underscores how our current system of rebuilding after storms can’t afford a future of more frequent and powerful weather.

Flood waters from Hurricane Florence surround a house and flow along the street on September 16, 2018 in Fayetteville, North Carolina. Rain continues to inundate the region causing concern for large scale flooding after Hurricane Florence hit the North Carolina and South Carolina area.
Getty Images

A flood of biblical proportions, the second 1,000-year rain event in as many years, a storm dumping 18 trillion gallons of rain that caused 16 major rivers to flood.

While the extent of Hurricane Florence’s damage to the Carolinas and Eastern Seaboard won’t be fully understood for months, preliminary estimates suggest that it will be staggering. CoStar estimated $33.5 billion in commercial real estate would be threatened. Moody’s prediction earlier this week that the total damage could range from $17 to $22 billion was immediately deemed too conservative in the wake of a storm that already dumped 36 inches of rain on parts of North Carolina in a single 24-hour period.

But more important and tragic is the human toll, both in lives lost and homes damaged or swept away. As of the afternoon of September 20, 41 people are reported dead, many whom were fleeing the rising waters on increasingly inundated and overwhelmed roadways. On-the-ground reporting also illustrated that the brunt of the housing damage will impact lower-income residents. According to a pre-storm analysis from the National Low-Income Housing Coalition, nearly 280,000 very low-income renter households reside in counties where hurricane, storm surge, or tropical storm alerts have been issued due to Florence. Roughly half of those households lack a car for evacuation.

A woman on cellphone calls for help at her flooded residence in Lumberton, North Carolina, on September 15, 2018 in the wake of Hurricane Florence. Members of the Cajun Navy came to her rescue.
AFP/Getty Images

The repercussions of our broken flood insurance system

Florence, like recent major storms Harvey, Irma, and Maria, show how this country’s system of flood insurance is broken, in large part to an under-investment in resiliency and a willful ignorance of climate risk.

The Washington Post estimates that homeowners in the most hard-hit counties are woefully underprepared for the aftermath of the storm. Only one in 10 homes has flood insurance, meaning a majority of homeowners will only be getting assistance through grants from the Federal Emergency Management Agency (FEMA), which normally covers just $10,000 in aid. Many erroneously think their homeowner policy may cover minor flooding.

The government’s main program for funding rebuilding, the National Flood Insurance Program (NFIP), is simply not set up to handle the realities of current and future storms. The NFIP relies on outdated maps, which derive risk without fully factoring in the accelerating impact of climate change. Since the government backs the program and assumes all the risk, private property owners with policies continue to rebuild in threatened areas, which have seen more and more construction as cities and development expand into flood-prone areas.

Some homeowners have rebuilt the same coastal McMansion three or more times, knowing Uncle Sam will foot the bill after the next big storm knocks it down. The program, which is now running at a loss, in effect subsidizes risky behavior. And in the areas where the government requires flood insurance, called special flood hazard areas, many homeowners don’t buy coverage because it’s considered too costly or unnecessary, and government does little to enforce the requirement.

The NFIP is giving too much money to properties that shouldn’t be built, and not protecting enough at-risk homes in threatened and low-income areas.

An apartment for rent sign is seen in a flooded street caused by the combination of the lunar orbit which caused seasonal high tides and what many believe is the rising sea levels due to climate change on September 30, 2015 in Fort Lauderdale, Florida.
Getty Images

A future of more furious storms is already here

Insurance industry experts aren’t expecting Florence to be as costly as Harvey, in terms of total payouts or damage to the overall economy. But they do expect it to be messy, since insurance companies will be arguing for water-related damage assessments, which will shortchange the vast majority of property owners without flood damage.

This situation will become worse over time. As climate change has advanced, the cost of insuring and rebuilding property has skyrocketed. The National Flood Insurance program was solvent through 2004. But the next year, Katrina hit. Then Sandy in 2012, followed by catastrophic flooding in 2016. In 2017, the country saw a record-setting number of billion-dollar natural disasters. Insurance companies literally ran out of adjusters to assess claims and damages.

Harvey, which struck in August 2017, cost the NFIP $8.7 billion as of September 6, 2018. For Florence, the Consumer Federation of America expects that the NFIP, and a few private insurers of flood insurance, will handle as many as 100,000 flood claims for over $7 billion.

But that’s just pennies compared to what’s coming. Earlier this June the Union of Concerned Scientists released “Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate,” a detailed analysis of future flood risks and property damage.

The report estimates that by 2045, roughly 300,000 homes and commercial properties in the continental United States may face chronic, disruptive flooding, threatening $135 billion in property, and potentially forcing the more than 280,000 current residents to adapt or relocate. Eventually, the report predicts, this type of frequent flooding may create a coastal real estate crash, a downturn with more lasting effects than other recessions because this newly flooded land will impact won’t “bounce back” and will hit institutional investors and the wider economy.

Communities with highest potential flooding-related real estate losses

Name State Homes at risk Value at risk Property tax at risk Population currently housed in at-risk homes
Name State Homes at risk Value at risk Property tax at risk Population currently housed in at-risk homes
Miami Beach FL 12,095 $6,443,424,737 $91,013,636 15,482
Southampton NY 594 $3,632,414,659 $70,466,512 778
Ocean City NJ 7,251 $3,559,834,800 $31,992,269 4,061
Central Coast CA 2,652 $3,515,837,640 $38,029,502 5,887
San Jose CA 2,574 $2,587,275,046 $29,536,278 7,104
San Mateo CA 3,825 $2,126,449,685 $28,542,062 9,716
Miami FL 5,718 $2,115,800,018 $37,261,591 13,037
Long Beach NJ 2,912 $2,027,390,300 $19,946,350 961
Upper Keys FL 3,514 $1,838,699,914 $16,273,796 3,865
Bradenton FL 4,368 $1,837,661,024 $21,225,539 7,600
Key West FL 3,709 $1,675,527,450 $14,684,991 6,491
Hilton Head Island SC 2,716 $1,486,650,600 $13,196,567 3,042
Hempstead NY 4,571 $1,447,384,405 $41,899,956 13,302
Lower Keys FL 3,415 $1,398,112,163 $12,975,389 4,508
Avalon NJ 1,351 $1,339,607,500 $7,309,545 338
Charleston Central SC 1,629 $1,333,885,777 $11,476,441 2,883
Toms River NJ 3,648 $1,317,185,100 $29,650,131 7,551
Kiawah Island-Seabrook Island SC 1,562 $1,315,627,363 $13,056,057 937
Long Beach-Lakewood CA 1,938 $1,299,068,902 $15,610,079 5,136
West Palm Beach FL 771 $1,210,159,069 $17,281,943 1,365
Foley AL 3,422 $1,204,521,095 $5,378,103 3,833
Sea Isle City NJ 2,006 $1,192,216,600 $7,974,321 622
Queens NY 2,735 $1,177,852,265 $9,504,807 7,193
Beach Haven NJ 1,372 $1,091,621,100 $11,634,246 604
Nantucket MA 283 $1,008,239,000 $3,417,931 246
This 2018 chart reflects potential loses by 2045 Union of Concerned Scientists/Zillow

The nation needs to be realistic and fully understand a new era of flooding risk. So far, even in the wake of disasters such as Harvey, that hasn’t happened. FEMA updates of NFIP maps aren’t fully accounting for future flooding projections, meaning today’s new home or resort very likely isn’t paying its fair share for insurance. These are pricey losses for the federal government waiting to happen.

There doesn’t seem to be an easy, painless solutions. Raising insurance premiums means making coastal living that much more expensive, and potentially driving people out. Forced retreat, or restricting development on flood prone regions, is sure to be an extremely unpopular. But as the frequency and potency of storms increases, it’s clear business as usual is unsustainable.