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The US is making high-risk property owners bear more of the costs of climate change

Resident Joe Ryan paddles a kayak to check on his home in a flooded neighborhood along the Tittabawassee River, after the two dam failures in Midland, Michigan, U.S., May 20, 2020.
REUTERS/Rebecca Cook
Up to now, owners of low-value homes have effectively subsidized federal flood insurance for owners of high-value homes.
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The US government’s flood insurance program will see its biggest overhaul in 50 years today, in an effort to rescue it from at least $20 billion in debt brought on by mounting climate change disasters.

Homes and businesses in high-risk flood zones with mortgages from government-backed lenders are required to hold flood insurance. Most of these policies—about 5 million nationwide, worth a combined $1.3 trillion—are provided by the Federal Emergency Management Agency’s National Flood Insurance Program. Since the NFIP was created in 1968, it has paid out at least $68 billion in claims that help property owners rebuild after hurricanes and inland flooding.

But the program is off-kilter, paying out far more than it takes in: That $20 billion debt load was much higher before Congress cancelled $16 billion in NFIP debt in 2017. This is largely because premium rates are based on outdated and narrow criteria that don’t account for climate change; the system effectively forces low-risk properties to subsidize high-risk ones, and low-value properties to subsidize high-value ones. Now, zeroing in on the risk for individual homes could help level the playing field.

How flood insurance works

Flood insurance premiums have historically been set based only on whether a home is in a moderate or high risk zone, as determined by maps that can be decades old. A home’s individual flood risk, and its replacement value, aren’t taken into consideration. So an inexpensive home build on protective stilts would pay the same rate as a mansion on a crumbling cliffside, if they’re in the same zone. Across the US, the average annual premium is $920.

Some structures have been rebuilt through the NFIP multiple times; the highest-risk structures, which account for 0.6% of the total, have consumed nearly 10% of payouts, according to a 2019 analysis from Columbia Law School and the Natural Resources Defense Council. And that gap is projected to grow: By 2100, sea-level rise and coastal erosion could see the total floodplain covered by the program—defined as an area with a 1% or greater chance of experiencing a flood every year—expand up to 45%, according to FEMA. That, plus population growth and future coastal development, could double the number of properties needing coverage.

“The impacts of climate change have thrown a wrench into the gears of how the NFIP works,” NRDC attorney Joel Scata said. “Peoples’ understanding of how vulnerable they are to flooding is masked by these artificially low insurance rates.”

A new method for setting flood insurance rates

Under the new method, known as Risk Rating 2.0, rates will be set for each individual property on a broader range of metrics that include its replacement value and proximity to a potential flood source, with risk projected by updated disaster models. The new rates take effect Oct. 1 for new policies; existing policies will roll to the new rates by April 1, 2022. Under the new system—developed in response to pressure from Congress for the program to fix its financial woes—77% of policyholders will see an increase in their rates, of which the majority will be $10 per month or less. The rest will see no change or a decrease.

Most of the increases will be on a par with typical annual increases in the past, Scata said, but a small number of high-valued homes in high-risk places could see monthly increases of $100 or more. Single-family homes are more likely to see an increase than other properties (including apartment buildings, commercial buildings, farms, etc.).

The long-term goal of this overhaul is to gradually prod urban development away from areas that are likely to cost taxpayers money, and to shift more of the burden onto the homes that need the program the most, said Nicholas Pinter, associate director of the Center for Watershed Sciences at the University of California-Davis. Pinter and his colleagues built a searchable map of how rates will change in California, and a nationwide map is available from FEMA.

FEMA has so far only published estimates at the zip code level and not for individual properties, making it too early to tell what share of the burden will fall on low-income homeowners, whose properties, in part because of redlining and other forms of historical prejudice, are more likely to be situated in high-risk areas. FEMA’s methodology for assessing risk, including the assumptions it makes about the effectiveness of levees and other flood-mitigation measures, remains a black box, Pinter said.

“The hope is that Risk Rating 2.0 will further disincentive people staying in flood plains,” he said. “It seems to move the needle in the right direction, but there’s so much hidden under the hood of this thing we just don’t know.”

How to make flood insurance more equitable

Across the board, the insurance industry is struggling to keep its head above a growing deluge of natural disasters. In the US, insurance payouts averaged $31 billion per year during the 2010s, according to Grist, up from $19 billion in the previous decade. In California, private insurers are dropping coverage for millions of homes in high wildfire risk areas, effectively shifting more responsibility for disaster costs onto taxpayers.

Risk Rating 2.0 takes the opposite approach, consolidating risk with the most likely beneficiaries in an attempt to ease federal taxpayer debt. Hawaii will see the greatest share of policies increase, along with a number of states along the Gulf Coast.

Liz Russell, climate justice program director at the Foundation for Louisiana, said the program doesn’t adequately distinguish between vacation or luxury homes and communities with a historical or economic reason to remain in risky zones. Notwithstanding climate change, driving every resident away from the coast is neither equitable nor economically viable, she said.

“A lot of the communities in Louisiana that are most flood-prone are there by necessity, because they work in oil and gas or in fisheries,” she said. “We need to consider how residents with fewer resources should be able to remain in some places.”

The program is in need of further reform, Scata agreed. For one, FEMA should establish an option buy-out program (pdf) for low-income homeowners who would rather leave than accept higher rates. The new risk ratings should also be paired with climate-savvy updates to minimum building requirements, which are still “completely inadequate for the flood risk due to climate change,” he said. That way, new construction doesn’t mean an undue new flood risk. And FEMA should subsidize rates for low-income homeowners determined to remain in place.

“But that’s on Congress,” Scata said, “because currently FEMA cannot consider affordability when setting flood insurance rates.”

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