Jurisprudence

Raising Flood Insurance Premiums Sounds Fair. It Isn’t.

Most coastal homes are not expensive beach retreats.

A beachfront house on stilts on a clear day. Half of it has sunk into the rising water.
A storm-damaged house at a busted levy on the beach after Hurricane Ida in Grand Isle, Louisiana. Sean Rayford/Getty Images

The National Flood Insurance Program, or NFIP—one of the primary tools we use to manage the risk of flooding in the United States—is frequently derided as broken. Against a backdrop of rising seas and worsening storms, the program’s debt is already in the tens of billions of dollars, which is widely seen as an indication that the insurance it sells is woefully underpriced, leaving taxpayers on the hook for what feels like a subsidy to coastal living.

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In response, the Federal Emergency Management Agency is set to launch its plan to address some of these problems. “Risk Rating 2.0,” set to go into effect today, is the most ambitious overhaul of flood insurance pricing since the NFIP was created in 1968. Risk Rating 2.0 will add many new variables to the calculation of flood risk, making premiums track more closely the actual risk faced by each individual property. For many homeowners, this will mean cheaper flood insurance, but for most, premiums will go up, in some cases substantially. The plan has attracted widespread praise from experts, many of whom have been proposing similar changes for years.

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But there are already signs of trouble. Members of Congress from both sides of the aisle have recently indicated their opposition to the changes, most notably in the form of legislation that would strip FEMA’s power to eliminate subsidized rates without an act of Congress. They probably haven’t forgotten the last time Congress tried to reform NFIP pricing: In 2012, it eliminated subsidized premiums, only to find itself facing an unexpected groundswell of opposition, forcing it to undo much of its own work a mere 14 months later.

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Why is reform of the NFIP so hard? One problem is that flood risk is expensive, and many people can’t afford the premiums that would be required to cover it. FEMA’s own analysis showed that despite the popular image of fancy beachfront mansions in places like New Jersey and Florida, those types of homes are not actually the majority of flood-prone residences. According to a 2007 estimate by the Congressional Budget Office, more than 80 percent of NFIP policies are for primary homes, the median value of which is well under $500,000. People who live in flood zones tend to have lower incomes than those living outside of them. Indeed, more than a quarter of NFIP policyholders in flood zones are classified as low income.

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Raising premiums thus risks pushing people out of the program altogether, or creating a world in which communities are forced out of their homes in order of their ability to pay for flood insurance, with low-income areas the first to go. To its credit, FEMA acknowledges this problem and insists that Risk Rating 2.0 will make flood insurance more affordable for a broad swath of (mostly low-risk) policyholders.

But a deeper issue remains. Not all insurance is priced according to individual risk, and so there’s no real reason to think flood insurers ought to be either. Health insurers, for example, are prohibited by law from considering most factors that affect health risk, most notably preexisting conditions. This feels fair to us because of ideas like choice and consent: People don’t choose to get cancer or diabetes, and they often can’t choose to forgo medical care either. The prohibition on making care more expensive given certain conditions comes from the understanding that it would be unfair to saddle them with the often enormous financial burden of the care they need. We have decided, as a society, that the costs of medical care should be, to a significant degree, shared.

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So is flood risk like health risk? Is living in a flood-prone house like having a preexisting condition? Most commentators reject this idea out of hand, arguing that because people in flood-prone areas chose to live there, they ought to pay the full cost of doing so. This is certainly true of some people living with flood risk, like former Treasury Secretary and Goldman Sachs CEO Hank Paulson, who surely knew the risks of hurricanes and rising sea levels when he bought Little St. Simons Island—a low-lying patch of marshy land off the coast of South Carolina—for $33 million in 2014.

But many others probably didn’t choose to live in flood-prone areas, at least not in any morally significant sense. For a choice to be morally significant, it must be free, and to be free, it must be made with knowledge of the risks it entails and a genuine opportunity to choose differently. In other words, choices that are made in conditions of ignorance or coercion are not really choices at all.

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It may seem obvious to anyone paying attention that rising sea levels will inundate many coastal areas all over the country by 2100—the homes of 4.7 million people, according to one study. But individual living-location decisions must grapple with the flood risk affecting individual properties. Even FEMA’s official flood maps don’t take sea level rise (or any of the projected effects of climate change) into account on that level. As a result, studies routinely find that FEMA’s official maps understate the extent of flood risk all over the country, sometimes dramatically. According to a study by climate change analytics firm risQ, this problem also has a racial dimension: Communities of color are more likely to have their flood risk understated on FEMA’s maps, especially in inland areas.

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More profoundly, flood risk is typically communicated using a jargony metric known as a “return interval,” the percentage chance of a flood of particular magnitude occurring in a particular year. Hurricane Harvey, for example, was a “500-year” flood, meaning that it was an event with a 0.2 percent chance of occurring in any particular year. Most people understand terms like these to mean that a storm like Harvey should happen only once in a 500-year period, but as gamblers and baseball players eventually learn, the odds of an event happening this year are unaffected by whether it occurred last year. This is one explanation for Houston’s having experienced three “500-year” floods in as many years. Another explanation is that we don’t really know how likely these events actually are. We only have about 100 years of data to draw from, and with the climate warming rapidly, the predictive power of the past 100 years of data is a matter of deep uncertainty. Many people can thus be forgiven for not really understanding what they were getting into when they bought their flood-prone homes.

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The assumption that we all choose where to live is similarly fraught. Hank Paulson surely had many options open to him. But most of us don’t. We end up where we do thanks to some combination of family and work, and many residents of places like Houston, New Orleans, and Boston have found that the only neighborhoods they can afford are ones with a significant risk of flooding. If rising flood insurance premiums make such places unaffordable, residents might wonder with frustration where they are supposed to go. And as climate change makes the problem worse, it’s worth remembering that the individuals whose lives stand to be upended tend not to be the largest contributors to the problem.

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That many people didn’t choose the flood risk they now face doesn’t mean that we are stuck in a never-ending cycle of destruction and debt. Reform of the NFIP should focus less on charging everyone full-priced premiums and more on empowering people to make better choices about where they live. That means less emphasis on penalizing people for staying and more emphasis on incentivizing them to leave. Buyouts have long been touted as extremely cost-effective, and many residents of flood-prone areas have lobbied for them. But buyouts have so far been one-off programs with byzantine procedures, a situation that begs for reform. We must do a better job of communicating flood risk too. Nobody should buy a home in 2021 without some awareness of the danger that it might flood, expressed in terms that anyone can understand.

No reform of this problem will be easy. Flooding is the most common and most costly natural disaster in the United States, and the toll it takes will only grow as our climate continues to change. If we’re going to make progress at all, it’s best to start from a place of empathy for those facing the worst effects of our collective emissions. Many of them didn’t choose to end up on the front lines of climate change, and we owe it to them to help them escape.

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