The NFIP, Climate Change, and the Future of Flood Insurance

Flood insurance in the U.S. is largely dominated by the National Flood Insurance Program (NFIP), yet, the program struggles with sustainability as the provisions meant to lessen the government’s liability now increase it.

As the world watches the U.N.’s 26th Climate Change Conference in Glasgow, at home the NFIP is finally making changes to protect its solvency. Flooding is one of the most obvious intersections of climate change and insurance, and, as the NFIP bears most of the responsibility for U.S. flood insurance, it’s also the canary in the coal mine as far as whether the flood insurance sector of the industry is sustainable.

Every industry conference we attended this year had the feel of deja vu as each had multiple segments regarding climate change. While much of these talks revolved around data gathering and measuring, and were light on action, flood insurance is already well on its way to an existential-ish crisis: Without changes, the NFIP and flood insurance market we know will not be able to keep the flood gates open.

Climate change is increasing the amount of extreme flooding year over year, both in terms of frequency and severity. One climate advocacy group noted that flooding along the coast has doubled in only the last few decades. The pace of change is unsustainable, and panels at NAIC, SILA, and ITC conferences noted that the future of flood insurance will depend largely on government infrastructure action more than any innovations from insurance carriers.

Flooding is the most easily observable effect of climate change in the insurance industry, and it’s causing the NFIP to face some very existential questions about how to provide inexpensive flood coverage in a wetter world. While private insurers and government agencies have been relatively slow to act, some inevitable changes are making their way into NFIP policy as the federal government cranks up their attention on climate change, and other states are a little closer to taking some action.

History of NFIP

The NFIP started in the late ‘60s. Hurricanes and other disasters left segments of the population devastated, yet flood insurance was expensive, and flood maps were unreliable. The Federal Emergency Management Agency (FEMA) would be tasked with recovery after every natural disaster. In response, the government started the NFIP under FEMA to fund better flood data, encourage more sustainable zoning practices (as in, discouraging towns from sprouting up in historical floodplains), and to make flood insurance more affordable for those who truly need it.

While there are still plenty of private flood insurers, who have a lot more wiggle room now to pick and choose low-risk clients, most flood insurance is sold through the NFIP. There are several advantages to NFIP:

• Those in high-risk areas along the coast and river basins are able to get less costly insurance than if they had to purchase private policies that reflected their real risks
• Claims are backed by the full force of the federal government
• Those in FEMA-designated flood zones – prone to flooding – are required to purchase flood insurance
• Federal flood data can help municipalities and regional governments accurately assess risks for a community, theoretically helping policyholders by allowing governments to make smart investments in public infrastructure

Threats to NFIP sustainability

Unfortunately, exponentially increasing flood risks have wreaked havoc on the risk-spreading of the NFIP. The premise of insurance is that you spread risk amongst those who have high risk and those who have low risk. If everyone’s risk is increasing, it’s awfully hard to keep costs low.

Despite being on the front line of watching historical flood zones shift and grow, the NFIP hasn’t made changes to its program for a long time. In 2012, it looked like the program would get a facelift. Congress, worried about NFIP solvency, mandated the program roll back the subsidies it offers to those in more flood-prone areas and start pricing closer to the actual risk insureds face.

Two short years later, Congress clawed back the change – the increased cost to high-risk homes and businesses was substantial and would hardly incentivize them to retain insurance. Congress worried it might have the opposite effect, leaving the government to once again pick up the whole tab for emergency events to cover those who were uninsured.

Fixes for NFIP insolvency

The changes Congress punted in 2014 are back now as the government faces the inevitable fact that the NFIP is reaching insolvency. Increased flooding has made the status quo unsustainable. Under President Joe Biden, the government has made talking about climate change a fixture of every agency.

While much of the talk is still largely just that, talk, FEMA is making concrete changes to address the solvency of the NFIP. Starting Oct. 1, 2021, the NFIP will begin pricing annual flood insurance to account for more factors, such as:

• Regional flood risk (e.g., Florida coast vs. Arizona desert)
• Personal home risk (living in a valley vs. living on a hill)
• Property value and replacement costs

As the CNBC article states, prior to the October change, the owner of a $200,000 Montana home and the owner of a $1 million Florida coast estate could expect to pay similar rates. With the changes, the Florida homeowner will now pay more to account for their risk and higher property coverage limit. 

The earlier concerns about making NFIP coverage too expensive for those who live in or near flood zones have been replaced by other worries. Now, there is a growing concern that artificially keeping costs low is keeping local and regional governments from taking action on climate change resilience projects for local infrastructure. Adding in the awareness that flood zones are expanding as precipitation rates increase, the NFIP has also begun including climate projections in their cost, risk, and flood zone maps.

State CE for NFIP

The NFIP may be a federal program, but insurance is still a state-run proposition. In this case, the federal-state exchange is supported by the states reinforcing that all producers hoping to sell NFIP products must take continuing education (CE) courses to do so. We’ve elaborated a bit more on state-specific requirements for CE and the NFIP in this article if you’re interested.

Some states have taken a forward approach to the issues of climate resiliency as they pertain to flooding and insurance. Beginning Nov. 12, 2021, New York has implemented additional CE training for those selling NFIP insurance for licenses renewed on or after April 2022 – this is beyond the basic requirements of the program, and aimed at making sure consumers are not underinsured for their risks. 

Further, New York’s new CE requirements mandate that all insurance producers who hold licenses under a property and casualty line of authority have to have at least three hours of flood CE, regardless of whether they sell NFIP policies. 

The future of NFIP

Many questions about the future of the NFIP are left unanswered in a vacuum of federal policymaking. But some answers are largely dependent on both public and private investment in the following areas:

Slowing climate change

The elephant in the room in any flood discussion is whether we can hold the degrees of warming to a reasonable degree for human flourishing. While it’s unpleasant (and possibly unhelpful) to consider some hideous future hellscape where the shape of the continent is unrecognizable, there can be no real discussion about resiliency or program maintenance if our country can’t commit to changes that protect our ecosystems on a macro level.

Building resilience through infrastructure

By all rights, the Netherlands belong almost entirely underwater. But they aren’t; they have invested significant resources into building infrastructure that manages water distribution very efficiently. States such as coastal and Gulf states may need to consider water breaks, dams, retaining walls, drainage systems, and how they can mitigate water drainage in the cases of extreme precipitation. Infrastructure works. But it doesn’t happen overnight.

Building resilience through technology

The InsureTech Connect conference featured multiple panels that had somewhat defeatest attitudes toward the role technology might play in flood resiliency (ironic, we know). But some of the ITC participants building tech businesses in other countries had some interesting development.

In the “Climate Resilience – Floods” roundtable, cofounders and engineers from U.K.-based and internationally operating companies such as Previsico and FloodFlash discussed their use-cases of technology. One company discussed how their detailed precipitation maps have made it easier to implement early warning systems for those who may flood downstream if a certain precipitation is reached upstream. 

Another company presented how their company pairs flood gauges with coverage that only kicks in after a set measurement of flooding. For instance, if they only provide coverage for a business past the first foot of flooding, that business has an incentive to ensure its most expensive equipment is out of reach of the zone without coverage. This novel approach is meant to incentivize proactive, preventative measures and prevent an attitude of “what the heck, who cares, insurance will pick up the tab.” The intention is to eliminate unnecessary claims while encouraging more innovative approaches to water-damage prevention.

There seems to be no one silver bullet that will help shore up the NFIP and engineer climate resilience across insurance. Yet, with a sizable challenge to the front, and numerous tools both classic and modern in our toolbox, the next few years may see more of an answer to what the future holds for the NFIP and the future of flood insurance.

To keep up with changing regulations when it comes to flood insurance producers, see what AgentSync can do.