Time For A Makeover: Trade Groups Want A Revamp Of The Major Flood Insurance Program

After years of stops and starts, housing trade groups are urging Congress to pass a long-term extension to the National Flood Insurance Program. (Image generated by AI in Midjourney)

It is unsurprising that the National Flood Insurance Program (NFIP) is yet again up for renewal in a little over a month’s time. But after seven years of short-term extensions, the housing and insurance industries are pressing for change.

“We are hopeful that the new Congress will reauthorize the program for long term and also include certain reforms,” said Austin Perez, the National Association of Realtors’ senior policy representative on insurance. “But one of the big things that we’ve been doing is just making sure that while the longer-term reauthorization package is being worked on, is that we are advocating for Congress to not allow the program to lapse.”

Created by Congress via the National Flood Insurance Act of 1968, the NFIP has received 31 short-term extensions since its last long-term reauthorization expired in 2017. The program, which is administered by the Federal Emergency Management Agency (FEMA), is a public-private partnership between the federal government, the property and casualty insurance industry, states, local officials, lending institutions and property owners.

Under the “write your own” program, the 50-plus private insurers that are part of the NFIP can write flood insurance policies for homeowners and buyers who are in need of flood insurance. Funds to cover some claims are borrowed from the Department of the Treasury. The program is available in more than 22,000 communities nationwide, but to be part of the NFIP, communities must adopt and enforce regulations to reduce flood damage.

Since its inception, the program has received more than 2.6 million claims, and it currently protects about 4.6 million properties. In 2023 alone, the NFIP received 21,000-plus claims, totaling roughly $1 billion in claim payments.

A looming disaster

A main reason why the NFIP covers so many properties is that loans backed by the government-sponsored enterprises (GSEs) are required to have flood insurance. If the NFIP lapses, transactions involving GSE-backed loans can still close as the requirement for flood insurance is suspended until the NFIP is reauthorized.

Additionally, private insurers that are part of the NFIP are still able to process and pay claims on flood insurance policies as long as the funds to pay these claims are still available.

“Many people think that real estate transactions will be disrupted during a lapse of the NFIP, but the truth is, most transactions go through,” Perez said. “The real issue, though, is that properties in flood-prone areas might be sold without flood insurance, which puts buyers at risk.“

Perez said this issue is at the heart of the message NAR is sending to Congress about reauthorizing the bill next month.

Also advocating for another reauthorization of the NFIP is Douglas Heller, director of insurance for the Consumer Federation of America (CFA). Like Perez and NAR, he and the CFA have significant concerns about the consequences if the NFIP is allowed to lapse.

“There are millions of people in America who rely on flood coverage to protect the most important asset they own,” Heller said. “Letting the public flood program expire and hoping that the private market comes in would be an even bigger disaster and result in more problems than we currently have, as the private market for flood insurance is generally not protected financially by either by the public through taxes or guarantee associations.”

When it comes to reforms of the NFIP, one of the main things that trade organizations are advocating for is a long-term extension to the NFIP, which experts say would add some certainty to the market. “We need longer-term reauthorization,” Perez said. “Markets don’t do well with this uncertainty — am I going or have flood insurance in 30 days or not?”

Insurers share a similar view.

“We would love to see a longer reauthorization,” said Sean Kent, the senior vice president of insurance at FS Insurance Brokers. “If we are being optimistic, I think three years would be the best possible scenario, but even if we could get 12 months — because policies are written in 12-month terms — that would give up the knowledge that if we write a policy today, we’ll have support on it for the next 12 months.”

In addition to a long-term extension, Kent and others want to see changes in how insurance premium rates are determined through the NFIP.

“Standard insurance companies will underwrite based off of actuarial risk rate, so if you live in a higher-risk geographical area, you typically pay more for insurance, but the NFIP doesn’t necessarily work that way,” Kent said.

Instead of using actuarial rates, the NFIP has a risk rating system to determine an area’s given risk and the costs of premiums. Under this system, homeowners who are in a high flood-risk area don’t typically pay as much for their insurance as they would going through a private insurer. But according to some, this means NFIP’s pricing is more rigid than that of private insurers.

“Their pricing is based on zones and elevations, whereas private insurance is more specific to the home itself,” said Ted Olsen, a vice president at Goosehead Insurance Agency. “Under the NFIP, all the houses on one street may have very similar prices, but under private insurance, the home that has a creek in the back yard will have a higher premium than someone else on the street who carries less flood risk.”

$21 billion in debt

Although the NFIP’s system generates significant cost savings for some homeowners in high flood-risk areas, it has generated some problems. “The program is $21 billion in debt because there is not that equity in terms of underwriting and the way that rates are arrived at,” Kent said.

A recent report published by researchers at the University of Connecticut and the London School of Economics and Political Science supported the financial concerns that Kent has about the program.

“A business as usual approach to flood mitigation will cause the NFIP debt to increase further and culminate in a sudden housing market crash beginning sometime around 2060,” the report states. 

This research is mostly in line with a 2016 report from Freddie Mac, which predicts $160 billion of the housing market will drop below sea level by 2050 — and $238 billion by 2100.

The report looks at properties located on the Northeast U.S. coast that were impacted by Hurricane Sandy in 2012. Prior to the hurricane, property values in the region were rising “significantly faster than the national median.”

“Since Sandy, northeastern coastal properties have been a less competitive investment, with home value growth lagging the national median by about 25%,” the report states. ”In the months since hurricanes Helene and Milton, the US has paid $480 million to restore 54,000 damaged properties. Despite the NFIP-aided recovery of structures, market values have not recovered with listed sale prices dropping by approximately 15% at the time of this writing.“

’Failure of our public policy’

Along with these reforms, Bill Killmer, seniors vice president for legislative and political affairs at the Mortgage Bankers Association, would like to see greater participation in the program.

“I think we are finding in the wake of the last two natural disasters, particularly the one in North Carolina with Hurricane Helene, a lot of people didn’t have coverage, so we need to increase participation in the NFIP,” Killmer said.

At NAR, Perez believes an effective way to achieve this is to revamp the flood maps used to determine coverage areas, and to better educate consumers about flood risks.

“The current flood maps don’t cover most of the country. They are along the coastline, just right at the ocean and then along major rivers like the Mississippi,” Perez said. “So, when a storm like Harvey or Helene happens, we have these instances where a significant share of the flooding occurs outside of special flood-hazard areas. Look at what happened in Asheville — FEMA is not mapping in places like that.”

At the CFA, Heller warns that if changes such as updated maps are not made to the NFIP, it only increases the risk of seeing events like the one in Asheville happen again.

“Asheville proves the failure of our public policy and it shows how exposed and under covered we are,” Heller said.

With the increased frequency of major flood events, Perez and NAR believe it is imperative to have a consumer-facing tool for homeowners and buyers to know their flood risk. As it currently stands, Perez said buyers should be using the NFIP’s risk rating system to get a flood insurance quote.

“If you go get a rate quote and it is very high, you need to ask questions,” Perez said. “That is significant information, and what Congress needs to do is to provide FEMA with the resources to push out that information in a direct-to-consumer portal where they can see future flood risk data for their specific address.”

But homeowners are not the only ones Killmer would like to see increased participation from. He believes more private insurers could be participating in the program but aren’t. As part of any reforms to the NFIP, Killmer would like to see more ways to encourage private insurers to get involved, such as removing some of the barriers to entry.

While it remains to be seen if any serious changes are in the near future for the NFIP, Killmer is optimistic that the incoming Trump administration will be friendly toward the program.

“At a time when we’ve got a housing affordability crisis, this is definitely another added friction,” Killmer said. “I think we have some leaders on both sides — including Chuck Schumer in the Senate and Mike Johnson in the House — who are from states like New York and Louisiana who have a key dependency on the NFIP, so they are not going to let that program expire.”