Washington Worsened Hurricane Helene's Destruction

How the National Flood Insurance Program subsidizes living in high-risk flood zones

By Jack Nicastro of Reason. 

"At least 119 people have died as a result of Hurricane Helene as of Monday, reports CNN. While the Federal Emergency Management Agency (FEMA) is busy helping survivors in flood-stricken regions, its National Flood Insurance Program (NFIP) perversely incentivizes Americans to reside in these high-risk areas.

People choose to remain in flood-prone areas for many reasons, including proximity to family, work, and school. Uprooting oneself and one's family can be a painful thing to do, and choosing to take on risk to stay where you've established your home is understandable. But choosing to stay in these areas genuinely does involve considerable risk. According to FEMA, the average flood insurance claim in 2018 was $40,000, and that risk should be borne by the risk-taker.

The Biden-Harris administration approved an additional $715 million for FEMA's Flood Mitigation Assistance Program (FMAP) in advance of Hurricane Helene on September 23. FMAP, which falls under NFIP, makes up 15.5 percent of FEMA's budget and provides homeowners with subsidized flood insurance.

FEMA itself recognizes the folly of providing homeowners insurance at below-market rates. Established by the National Flood Insurance Act of 1968, the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) was passed to reduce debt incurred by the NFIP from Hurricanes Rita, Wilma, and Katrina in 2005.

BW-12 removed discounts for some NFIP policyholders so that their insurance rates would "more accurately reflec[t] their expected flood losses," according to FEMA's 2018 affordability framework. These reforms were as actuarially sound as they were unpopular and were overturned two years later.

The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) restored pre-BW-12 rates, repealed certain rate increases, and capped annual premium increases at 18 and 25 percent for primary homes and secondary residences, respectively. Congress instituted these effective price ceilings to encourage participation, but FEMA's affordability framework recognizes the market price of insurance as "one of the best signals of risk that a consumer receives."

The 2018 framework candidly admits that flood insurance affordability programs create perverse incentives, including "encouraging lower-income households eligible for assistance to purchase properties in very risky areas." And that's just what the NFIP has done: approximately 13 million homeowners live in Special Flood Hazard Areas (SFHAs), where there is at least a 1 percent annual risk of flooding.

NFIP deems 12 percent of these homeowners to have Principal, Insurance, Taxes, Insurance (PITI) to household income ratios in excess of the maximum affordable standard. Even with mandatory enrollment in SFHAs, which reduces insurance rates by forcibly expanding the base of the insurance program, the average policyholder cost for a single-family home is $1,098—more than twice the cost of policies outside the SFHAs.

Without NFIP-subsidized insurance, rates would increase, becoming unaffordable for some homeowners. Unaffordability is a feature of insurance markets, not a bug. High insurance rates discourage risky behavior that is likely to be even more painful than having to pull up roots.

More than 2 million homes and businesses lacked power as of Monday morning, reports The Weather Channel, and about 3,000 people were housed in shelters across five states, according to The New York Times. Artificially lowering insurance rates deprives homeowners of the very information that indicates the risk of such devastation and displacement.

FEMA's affordability framework argues good public policy consists of balancing "increased flood insurance take-up with increased program costs due to…policyholders paying less than full-risk rates." This balancing act is simple: The federal government must stop subsidizing NFIP and allow its more than 50 partnered insurance companies to set rates that fully reflect the risk of extreme weather events like Hurricane Helene."