Federal Flood Insurance - Drowning in Debt
The recent hurricanes, Harvey and Irma, prompt reflection on American
infrastructure and development policy. One major federal disaster relief and
infrastructure program is the National Flood Insurance Program (NFIP), which
subsidizes development in flood-prone areas. The NFIP is bad policy, for a
variety of reasons, and should be changed to phase-in actuarially sound
policies during the next few decades.
Hurricane Harvey’s destruction has yet to be fully documented. Hurricane Irma just ripped through Puerto Rico and threatens Florida with more devastation. These powerful storms, as a group, are not unexpected. Annual hurricanes have a long history along the Atlantic and Gulf coasts.[1] Modeling by the U.S. Geological Survey, conducted in 2009, found that “natural resource managers of coastal ecosystems should expect at least 1 major hurricane of Category 3 or greater to strike the north-central Gulf coast every 20 years.”[2] The modifier ‘at least’ is very important. We should expect more destructive storms in the Southeast than the USGS modeling predicted.
In recent years, climate scientists’ ability to link anthropogenic forcing to certain extreme weather events has increased immensely. The predictive ability of climate models varies widely depending on the type of weather event and the variable to be modeled, such as incidence or severity. There are numerous factors that induce extreme weather, some more or less directly linked to human activities. Therefore, models are able to more reliably predict events like the incidence of heatwaves and the increased probability of heatwaves in our current environment versus an environment without human greenhouse gas emissions. The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report stated that it is “likely that human influence has more than doubled the probability of occurrence of heat waves in some locations.”[3] The National Academy of Sciences labeled heat waves as “the extreme weather events for which attribution studies are most straightforward.”[4]
Modeling for climate change impacts on tropical cyclones is less conclusive yet still informative. Since hurricanes are infrequent and short events, arriving at observational conclusions of statistical significance is difficult.[5] Nonetheless, “broad consensus has emerged as to the expected future trends and their levels of certainty.”[6] There is considerable confidence, backed by both well-established theory about the maximum potential intensity of tropical cyclones and by numerous numerical models, that tropical cyclones will “become more intense as the climate warms.”[7] We still need to wait-and-see what storms develop over the next few decades to verify theory with observational results, but it would not be surprising to suffer hurricanes with historic wind speed[8] and/or rainfall[9] more frequently. Additionally, based on our robust confidence in medium-term sea level rise, “[c]oastal flood risk due to storm surge is projected to increase” during hurricanes.[10]
Severe hurricanes created widespread awareness of the need for large recovery outlays many decades ago. Hurricane Betsy, the first storm to cause more than $1 billion in damage,[11] induced Congress to pass the National Flood Insurance Act in 1968, creating the National Flood Insurance Program (NFIP).[12] Hurricane disaster response requires massive spending and federal expenditures, in both absolute and relative terms, have increased dramatically since Betsy. CNN estimates that federal funds covered only 17% of hurricane recovery spending before Katrina while they have accounted for 62% of hurricane recovery spending since, totaling more than $200 billion and covering 72% of Katrina’s damage and 80% of Sandy’s damage.[13] Federal assistance comes from many sources including the Federal Emergency Management Agency’s (FEMA) Disaster Relief Fund and the aforementioned NFIP.[14] Much of that funding is targeted at rebuilding infrastructure like homes and businesses.
Insurance, when priced correctly, is great. It allows individuals to offload the future risk of a low-probability catastrophic event in exchange for a small current payment, which is deposited in a common fund to pay for damage from said catastrophic event when it happens to anyone who paid into the fund. As a whole, insured people internalize cost of the catastrophic event and, as individuals, insured people internalize the probability-weighted cost of the catastrophic event happening to them.
However, the NFIP is not an ordinary insurance program; it subsidizes development, both new and reconstruction, in flood prone areas. By some estimates, homeowners could buy policies throughout most of the 21st century for half the ‘actuarial’ rate that private insurers would offer.[15] According to the U.S. Government Accountability Office (GAO), as of March 2016 FEMA had a $23 billion deficit, made up mostly of unfunded NFIP payouts, placing the NFIP on the GAO’s High Risk List.[16]
The NFIP is bad policy because it is provides perverse incentives for people to build and live in flood-prone areas, paid for by the rest of the country. It is bad economic policy because it encourages wasteful spending of our nation’s limited resources. Labor and materials are going into infrastructure in flood zones that will be destroyed before it can be paid for, rather than getting invested in more sustainable locations. The NFIP subsidy, by encouraging development in flood zones, also countenances environmental damage by making it artificially cheap for developers to fill in flood plains, marshes, and sand dunes with cement and boardwalks. The NFIP is also bad health policy. People die and get hurt in natural disasters, and the rapid physical displacement caused by flooding leads to severe emotional and physical distress.
The NFIP’s shortcomings are widely recognized and Congress has tried to place the NFIP on a more sustainable path. The last time the NFIP was reauthorized by the Biggert-Waters Flood Insurance Reform Act, in 2012, Congress voted to increase premiums, enhance flood mapping, and incorporate private reinsurance in the market.[17] Congress’ retraction of this federal housing subsidy was observable in the insurance market as premiums for homeowners inexorably increased. However, the market response of increased premiums was so unpalatable politically that Congress soon overwhelming passed the Homeowner Flood Insurance Affordability Act of 2014, rolling back those reforms and reverting the NFIP into deeper unsustainability. Clearly, FEMA’s NFIP debt was expected to grow if no action was taken, and many Congressional representatives had proposed reforms to the NFIP in anticipation of its renewal, required before September 30th of this year.[18] But, with the landfall of Harvey and possibly Irma, many of these reforms appear, pardon the pun, dead in the water. Therefore, FEMA’s NFIP debt will increase and the federal subsidy of unsustainable coastal development will expand.
Despite clear economic, health and safety, and environmental arguments in favor of the federal government retracting NFIP subsidies and letting homeowners internalize the full costs of flooding through actuarially sound insurance, politics and decency require a phased approach. Many researchers have estimated that about 50% of the U.S. population lives in coastal areas.[19] However, the Coastal Education and Research Foundation estimated in 2010 that only about 8.6 million people, or 3% of the population, actually live in flood prone areas.[20] This population is dispersed across the nation. It runs down the entire eastern seaboard, from Maine south around Florida and west to the southern tip of Texas.[21] It covers the entire western seaboard, from Puget Sound to San Diego.[22] And Chicago doesn’t get off easy either, with flood prone counties stretching from upstate New York around the Great Lakes and through to Minnesota.[23] Clearly, many Senators and Representatives have constituents who rely on the federal subsidy for flood insurance. Those constituents, especially those with marginal or worse economic stability built on long-held reliance interests in the NFIP subsidy, cannot be inundated with suddenly-higher premiums.
There are many specific proposals for reformation of the NFIP, which I will not address here. Suffice to say that a few overarching goals should be effectuated in reforming the program. First, premiums should be allowed to rise to reflect actual expected flooding. This includes robust mapping and the incorporation of predictive models for things like severe hurricanes. Second, premiums should rise faster for people with more wealth. Citizens with the financial means to internalize the expected costs of their chosen place-of-residence should do so soon, or move. Their migration will reduce the incidence of flood-prone residences and also reduce demand for at-risk support infrastructure. Meanwhile, citizens without the financial means to internalize the cost of where they live should be given more time to transition. Third, any home buyer in a flood-prone area should be required to purchase actuarially sound flood insurance. This reform might also be phased-in to help preserve home resale values. Finally, when flooding does occur, insurance payments to those who do not pay premiums into actuarially sound policies should be tied to stricter deployment terms. In other words, someone who receives subsidized flood insurance should be subject to use-conditions favoring resettlement in a less flood prone area.
For those who hate government waste, this program looks ripe for reform. The various undesirable impacts of the NFIP subsidy: it funds short-term environmental damage, long-term unsustainable development, tax subsidies to wealthy coast-dwellers (poor people too. Again, means-test premium increases), additional spending on disaster relief when the inevitable happens, and increased levels of humanitarian crisis when the disaster relief invariably has pitfalls, unite various political interests in favor of reforming the program. Even while accommodating vested financial interests in flood-prone areas, we can do better than the current structure of the NFIP.
Hurricane Harvey’s destruction has yet to be fully documented. Hurricane Irma just ripped through Puerto Rico and threatens Florida with more devastation. These powerful storms, as a group, are not unexpected. Annual hurricanes have a long history along the Atlantic and Gulf coasts.[1] Modeling by the U.S. Geological Survey, conducted in 2009, found that “natural resource managers of coastal ecosystems should expect at least 1 major hurricane of Category 3 or greater to strike the north-central Gulf coast every 20 years.”[2] The modifier ‘at least’ is very important. We should expect more destructive storms in the Southeast than the USGS modeling predicted.
In recent years, climate scientists’ ability to link anthropogenic forcing to certain extreme weather events has increased immensely. The predictive ability of climate models varies widely depending on the type of weather event and the variable to be modeled, such as incidence or severity. There are numerous factors that induce extreme weather, some more or less directly linked to human activities. Therefore, models are able to more reliably predict events like the incidence of heatwaves and the increased probability of heatwaves in our current environment versus an environment without human greenhouse gas emissions. The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report stated that it is “likely that human influence has more than doubled the probability of occurrence of heat waves in some locations.”[3] The National Academy of Sciences labeled heat waves as “the extreme weather events for which attribution studies are most straightforward.”[4]
Modeling for climate change impacts on tropical cyclones is less conclusive yet still informative. Since hurricanes are infrequent and short events, arriving at observational conclusions of statistical significance is difficult.[5] Nonetheless, “broad consensus has emerged as to the expected future trends and their levels of certainty.”[6] There is considerable confidence, backed by both well-established theory about the maximum potential intensity of tropical cyclones and by numerous numerical models, that tropical cyclones will “become more intense as the climate warms.”[7] We still need to wait-and-see what storms develop over the next few decades to verify theory with observational results, but it would not be surprising to suffer hurricanes with historic wind speed[8] and/or rainfall[9] more frequently. Additionally, based on our robust confidence in medium-term sea level rise, “[c]oastal flood risk due to storm surge is projected to increase” during hurricanes.[10]
Severe hurricanes created widespread awareness of the need for large recovery outlays many decades ago. Hurricane Betsy, the first storm to cause more than $1 billion in damage,[11] induced Congress to pass the National Flood Insurance Act in 1968, creating the National Flood Insurance Program (NFIP).[12] Hurricane disaster response requires massive spending and federal expenditures, in both absolute and relative terms, have increased dramatically since Betsy. CNN estimates that federal funds covered only 17% of hurricane recovery spending before Katrina while they have accounted for 62% of hurricane recovery spending since, totaling more than $200 billion and covering 72% of Katrina’s damage and 80% of Sandy’s damage.[13] Federal assistance comes from many sources including the Federal Emergency Management Agency’s (FEMA) Disaster Relief Fund and the aforementioned NFIP.[14] Much of that funding is targeted at rebuilding infrastructure like homes and businesses.
Insurance, when priced correctly, is great. It allows individuals to offload the future risk of a low-probability catastrophic event in exchange for a small current payment, which is deposited in a common fund to pay for damage from said catastrophic event when it happens to anyone who paid into the fund. As a whole, insured people internalize cost of the catastrophic event and, as individuals, insured people internalize the probability-weighted cost of the catastrophic event happening to them.
However, the NFIP is not an ordinary insurance program; it subsidizes development, both new and reconstruction, in flood prone areas. By some estimates, homeowners could buy policies throughout most of the 21st century for half the ‘actuarial’ rate that private insurers would offer.[15] According to the U.S. Government Accountability Office (GAO), as of March 2016 FEMA had a $23 billion deficit, made up mostly of unfunded NFIP payouts, placing the NFIP on the GAO’s High Risk List.[16]
The NFIP is bad policy because it is provides perverse incentives for people to build and live in flood-prone areas, paid for by the rest of the country. It is bad economic policy because it encourages wasteful spending of our nation’s limited resources. Labor and materials are going into infrastructure in flood zones that will be destroyed before it can be paid for, rather than getting invested in more sustainable locations. The NFIP subsidy, by encouraging development in flood zones, also countenances environmental damage by making it artificially cheap for developers to fill in flood plains, marshes, and sand dunes with cement and boardwalks. The NFIP is also bad health policy. People die and get hurt in natural disasters, and the rapid physical displacement caused by flooding leads to severe emotional and physical distress.
The NFIP’s shortcomings are widely recognized and Congress has tried to place the NFIP on a more sustainable path. The last time the NFIP was reauthorized by the Biggert-Waters Flood Insurance Reform Act, in 2012, Congress voted to increase premiums, enhance flood mapping, and incorporate private reinsurance in the market.[17] Congress’ retraction of this federal housing subsidy was observable in the insurance market as premiums for homeowners inexorably increased. However, the market response of increased premiums was so unpalatable politically that Congress soon overwhelming passed the Homeowner Flood Insurance Affordability Act of 2014, rolling back those reforms and reverting the NFIP into deeper unsustainability. Clearly, FEMA’s NFIP debt was expected to grow if no action was taken, and many Congressional representatives had proposed reforms to the NFIP in anticipation of its renewal, required before September 30th of this year.[18] But, with the landfall of Harvey and possibly Irma, many of these reforms appear, pardon the pun, dead in the water. Therefore, FEMA’s NFIP debt will increase and the federal subsidy of unsustainable coastal development will expand.
Despite clear economic, health and safety, and environmental arguments in favor of the federal government retracting NFIP subsidies and letting homeowners internalize the full costs of flooding through actuarially sound insurance, politics and decency require a phased approach. Many researchers have estimated that about 50% of the U.S. population lives in coastal areas.[19] However, the Coastal Education and Research Foundation estimated in 2010 that only about 8.6 million people, or 3% of the population, actually live in flood prone areas.[20] This population is dispersed across the nation. It runs down the entire eastern seaboard, from Maine south around Florida and west to the southern tip of Texas.[21] It covers the entire western seaboard, from Puget Sound to San Diego.[22] And Chicago doesn’t get off easy either, with flood prone counties stretching from upstate New York around the Great Lakes and through to Minnesota.[23] Clearly, many Senators and Representatives have constituents who rely on the federal subsidy for flood insurance. Those constituents, especially those with marginal or worse economic stability built on long-held reliance interests in the NFIP subsidy, cannot be inundated with suddenly-higher premiums.
There are many specific proposals for reformation of the NFIP, which I will not address here. Suffice to say that a few overarching goals should be effectuated in reforming the program. First, premiums should be allowed to rise to reflect actual expected flooding. This includes robust mapping and the incorporation of predictive models for things like severe hurricanes. Second, premiums should rise faster for people with more wealth. Citizens with the financial means to internalize the expected costs of their chosen place-of-residence should do so soon, or move. Their migration will reduce the incidence of flood-prone residences and also reduce demand for at-risk support infrastructure. Meanwhile, citizens without the financial means to internalize the cost of where they live should be given more time to transition. Third, any home buyer in a flood-prone area should be required to purchase actuarially sound flood insurance. This reform might also be phased-in to help preserve home resale values. Finally, when flooding does occur, insurance payments to those who do not pay premiums into actuarially sound policies should be tied to stricter deployment terms. In other words, someone who receives subsidized flood insurance should be subject to use-conditions favoring resettlement in a less flood prone area.
For those who hate government waste, this program looks ripe for reform. The various undesirable impacts of the NFIP subsidy: it funds short-term environmental damage, long-term unsustainable development, tax subsidies to wealthy coast-dwellers (poor people too. Again, means-test premium increases), additional spending on disaster relief when the inevitable happens, and increased levels of humanitarian crisis when the disaster relief invariably has pitfalls, unite various political interests in favor of reforming the program. Even while accommodating vested financial interests in flood-prone areas, we can do better than the current structure of the NFIP.
[1] Thomas
W. Doyle, Hurricane Frequency and
Landfall Distribution for Coastal Wetlands of the Gulf Coast, USA, 29(1)
Wetlands 35, 37 (2009) (documenting the chronology of hurricane strikes in New
Orleans, LA and Galveston, TX from 1850 to 2010).
[2]
Id. at 39.
[3] IPCC,
2013: Climate Change 2013: The Physical
Science Basis. Contribution of Working Group I to the Fifth Assessment Report
of the Intergovernmental Panel on Climate Change. Cambridge University
Press, Cambridge, United Kingdom and New York, NY, USA.
[4]
Committee on Extreme Weather Events and Climate Change Attribution, Attribution of Extreme Weather Events in the
Context of Climate Change, National Academies of Sciences, Engineering, and
Medicine, 92 (2016).
[5]
Id. at 109.
[6]
Id.
[7]
Id. at 110.
[8]
Chris Dolce, Irma’s Notable Extremes: All
the Historical Benchmarks It Has Hit So Far, The Weather Channel (Sept. 7,
2017).
[9]
Bob Henson, Harvey in Houston: Most
Extreme Rains Ever For a Major U.S. City, Weather Underground (Aug. 29,
2017).
[10] Attribution of Extreme Weather at 110, supra note 4.
[11]
Arnold L. Sugg, The Hurricane Season of
1965, 94(3) Monthly Weather Review 183, 189 (1966) (stating that hurricane
Betsy caused almost $1.5 billion in damage).
[12] NFIP Perspectives History & Background – Transcript, available at https://www.fema.gov/media-library.../NFIPPerspectives_History_Transcript.docx.
[13]
Ryan Struyk, What past federal hurricane
aid tells us about money for Harvey recovery, CNN (Sept. 7, 2017), http://www.cnn.com/2017/08/31/politics/hurricane-harvey-recovery-money/.
[14]
Id.
[15]
Alexander B. McDonnell, The Biggert-Water
Flood Insurance Reform Act of 2012: Temporarily Curtailed by the Homeowner
Flood Insurance Act of 2014 – A Respite to Forge an Enduring Correction to the
National Flood Insurance Program Built on Virtuous Economic and Environmental
Incentives, 49 Wash. U.J.L. & Pol’y 235, 238 (2015).
[16]
U.S. Government Accountability Office, 2017
High Risk Report – National Flood Insurance Program, available at https://www.gao.gov/highrisk/national_flood_insurance/why_did_study.
[17] The Biggert-Waters Flood Insurance Reform
Act of 2012 at 239, supra note
15.
[18]
Id.
[19]
Mark Crowell, et al., An Estimate of the
U.S. Population Living in 100-Year Coastal Flood Hazard Areas, 26(2)
Journal of Coastal Research 201 (2010).
[20]
Id. at 210. “Flood prone” defined as having at least a 1% chance of flood in
one year, also known as the 100 year flood.
[21]
Id. at 206.
[22]
Id.
[23]
Id.
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