National Flood Insurance Program in Deep Waters

A natural disaster wrought a national program to provide flood insurance to Americans. Another could wipe it out.

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Aug. 14, 2016 — Danielle Blount kisses her three-month-old baby, Ember, as she feeds her and wait to be rescued from floodwaters by members of the Louisiana Army National Guard near Walker, La. Man-made climate change about doubled the chances for the type of heavy downpours that caused devastating Louisiana floods in August 2016, a new quick federal study finds. “We are now actually able to objectively and quantifiably say ‘yes climate change contributed to this event’,” Climate Central Chief Scientist Heidi Cullen said of last month's Louisiana downpours. “It's unequivocal.”

AP Photo/Max Becherer, File

“I am afraid we are going to find many more lost than we had thought.”

That was how then-president Lyndon B. Johnson tersely characterized the devastation wrought by Hurricane Betsy to a reporter from the New York Times on September 12, 1965 after he surveyed the damage in New Orleans three days after the hurricane made landfall. The storm took the lives of 76 people, and caused some $1.5 billion (11.6 billion in 2017 dollars) in damage, making it the country’s first billion-dollar storm.

Betsy’s most enduring impact, however, has been on the nation’s disaster insurance programs. After the devastating Mississippi River Flood of 1927, private insurers largely abandoned the US flood insurance market, leaving congress to put together ad hoc recovery plans for disaster-stricken areas. When Betsy struck in 1965, flood insurance was entirely unavailable to those in the disaster area. The damage wrought by the hurricane, however, provided the political impetus for dramatic change, and in 1968 the nation launched the National Flood Insurance Program (NFIP), a federally administered program to bring affordable flood insurance to at-risk property owners. Fifty years later, however, one of the world’s longest standing government-run disaster insurance programs is showing signs of strain.

The biggest problem with flood insurance is that no one knows exactly what it should cost. And, thanks to generous government subsidies provided through NFIP, few people even know how much it actually does cost.

A few experts scattered through the private sector and some of the world’s top universities have produced intricate models with a dizzying array of risk-assessment inputs, all of which continue to mutate due to the continuing uncertainty over the impact of climate change. Some of these models may sync up or overlap; others may not. No one’s really sure at this point because many of these models are proprietary and can’t be shared, while the public models, including those used by the US Federal Emergency Management Agency, may be based on outdated data and are susceptible to political squabbling.

“We spend a lot of time at meetings like this talking about financing risk,” Stephen Weinstein, a senior vice president at RenaissanceRe Holdings Ltd., a reinsurance firm, told a mixed crowd of investors, academics, and policy makers on May 2, 2017 at a conference held by Columbia Business School’s Tamer Center for Social Enterprise. “But we spend almost no time talking about the number of Americans who are literally in harm’s way, against risks that are increasing all the time. We’ve lost more Americans to climate-related disasters in the United States since 9/11 than we have to terrorism.”

Despite the importance of the program, NFIP faces significant challenges, including immediate concerns over its solvency. Between 2005 and 2012 the program was forced to borrow several billion dollars from the US Treasury to make payments to those affected by Hurricanes Katrina and Rita, as well as Superstorm Sandy — money the Government Accountability Office asserted in its 2017 report that the program would be unlikely to be able to pay back. As it stands, the program is nearly $25 billion in debt.

Government-subsidies also obscure market signals, according to Christopher Mayer, a professor of real estate at Columbia Business School, which may have the unintended effect of putting more people in harm’s way.

The humanitarian argument for subsidizing at-risk areas would seem to be clear: Without it, those least able to afford the economic shock of a disaster, or to relocate away from high-risk areas, couldn’t afford the coverage that would make it survivable. A 2012 amendment to the law, the serendipitously named Biggert-Waters Flood Insurance Reform Act, was meant to put NFIP on more solid fiscal footing by gradually allowing rates to rise to reflect actual risk and ceasing coverage for second homes and properties that had been flooded multiple times. The act, however, was partially reversed in 2014 by the equally ominous-sounding Grimm-Waters Act of 2014.

In Mayer’s view, these continued subsidies sacrifice long-term economic soundness for potential short-term political gain. Similarly, cities are reluctant to designate any more land than absolutely necessary as high-risk flood zones because, in addition to imposing additional costs on voters, it may scare away developers. In 2015, New York City appealed the new flood maps issued by FEMA, designed to indicate the longer-term risk posed by climate change, which placed an additional 35,000 homes in the city into high-risk areas.

“It seems that every time a flood map is drawn,” Mayer explained, “local politicians run to Washington and say, ‘Hey, you’re raising insurance prices on poor and disadvantaged people in my community; how could you make housing unaffordable?’ So FEMA redraws the maps to get rid of some places that are flood prone and officials create programs to subsidize the cost of flood insurance in high risk areas. That includes parts of New Orleans that flooded during Hurricane Katrina. And that includes parts of the New York area that flooded during Hurricane Sandy.”

New York City contends the appeal of FEMA’s map wasn’t a political maneuver, but rather that the agency had overestimated the size of floodplains and base elevations. “Our interest is in making sure, for insurance purposes, that we have the most accurate maps,” said Dana Kochnower, senior policy adviser at the NYC Mayor’s Office of Recovery and Resiliency. The city and agency have agreed, at least temporarily, to proceed by using two different maps, one reflecting current risk and one showing the long-term risks associated with climate change. It’s unclear how this will affect the city’s proposed spending of more than $350 million on waterfront development over the next decade.

But if people don’t face the financial risk associated with living in flood-prone locations, their behavior will never change, Mayer said. Even as some homeowners have begun paying closer attention to climate change — a recent New York Times story showed real estate sales slowing in some flood-prone areas up and down the East Coast — Mayer’s data show that in other at-risk areas, including the Pacific Northwest hubs of Seattle and Portland, Washington, D.C., and South Florida, prices generally are trending upward.

“If people believe that the government is going to rebuild their homes when they get flooded, they won’t worry about buying insurance or investing in places at high risk of flooding,” Mayer said at the forum, presented jointly by Columbia Business School and Columbia University’s Lamont‐Doherty Earth Observatory.

There’s a lot of Latin American money looking for safe harbor in the US by purchasing property in Florida, for example, Mayer added. “They may be safe from their governments and local economic conditions here, but they may or may not be safe relative to rising waters. And Hamptons prices are certainly rising quite a bit. It’s certainly not a consistent pattern when looking at climate change.”

In addition to skewing housing prices, a large subsidized risk pool encourages development in areas that are better off without it. Coastlines and nearby fields and forests that previously absorbed the brunt of a brutal storm, both wind and rain, are paved over and built upon, increasing the potential for and degree of damage to an area. Rising sea levels will only exacerbate that, said Adam Sobel, a Columbia professor of applied physics and applied mathematics and environmental sciences. A sea-level increase of about 3 feet could potentially turn a Category 3 hurricane into a Category 4, or a 4 into a 5.

“There will be little storms that never would have caused much of a problem, but now they will,” Sobel said. “If you raise the whole sea level, if the stuff on land hasn’t changed, you haven’t built new walls or whatever, it takes less of a storm to flood that.”

As Congress’s rapid about face in 2014 demonstrates, reforming NFIP faces significant political challenges. NFIP’s current authorization ends in September of this year, and in late May the House Financial Services Subcommittee on Housing and Insurance released draft legislation that would reauthorize the program for five more years. The bill contains a number of proposals for reform to the program, but falls short of a full overhaul and doesn’t include some of the more aggressive proposals to address the program’s current shaky financial footing like the Government Accountability Office’s call for complete forgiveness of the program’s current debt.

Despite the challenges, Weinstein sounded an optimistic note at the conference. “The problem with risk is that it’s happening but you can’t always see it,” he said, stressing that the brunt of poorly calculated risk tends to fall on the most vulnerable. “Americans with less: in effect, we tell them to stay in place, go to the Superdome. We did that for Katrina, we did that for Sandy, we did it for the floods in Louisiana last year. Right now, we’re going to do it for the next Sandy. But we can fix this.”

About the researcher

Christopher Mayer

Christopher Mayer is the Paul Milstein Professor of Real Estate at Columbia Business School. His research explores a variety of topics in real estate...

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