Editorial: Flood insurance reforms needed

As we head into the final weeks of the 2024 hurricane season, businesses and homeowners across the Southeast will be anxious to see the back of it.

Damage from deadly storms over the past two months extended beyond towns and cities on the coast to hit communities that never expected to worry about hurricane-related losses. Hurricane Helene drenched and washed away properties as far inland as western North Carolina and eastern Tennessee, killing more than 200 people.

While losses from the storm are still being tallied, modeling firms predict that uninsured flood losses from Helene will be multiples of the insured flood loss. That will no doubt be partly because of the geographical spread of the flooding but also because the flood insurance system in the United States needs further reform.

The National Flood Insurance Program is set to expire in December, but after being extended in September it will likely be extended again without any significant changes. The program has provided coverage for businesses and homeowners since 1968, but it is more than $20 billion in debt, the premiums charged are seen as not reflecting the exposures the program covers, despite the Risk Rating 2.0 reforms that began in 2021, and the take-up rate is low.

In addition, critics argue that the program’s existence under the current framework encourages development in flood-prone areas.

Ideally, homes and businesses would not be built in areas with significant exposure to flooding, but millions have been, and it is too late to do much about that.

Instead, the NFIP should be changed to make the program more sustainable, grow the premium base to spread the risk more broadly and, crucially, encourage private insurers to participate more in the flood market.

The Risk Rating 2.0 reforms went someway to achieving this, but numerous other proposals have been touted that could further revive the NFIP, change overall flood risk management and shift more risk to the private insurance market. These include increasing premiums more quickly to reflect the risks they cover, providing means-tested subsidies for those who can’t afford the coverage, requiring or encouraging stricter building standards, and improving and publicizing flood-risk mapping.

None of this would be pain-free. Policyholders in states like Florida have already been hit hard by market trends pushing up premiums and deductibles for wind coverage, and paying more for flood coverage clearly would add to their burdens. But the reality is the climate is changing, flooding is likely to worsen, and changes need to happen to ensure homeowners and businesses are adequately protected.

Revisions will require difficult decisions and some increased short-term costs, but a long-term solution must be designed to manage flood risks better and improve resilience.