High or low seas, flood insurance must reflect risk

Even if there wasn’t evidence of rising sea levels, flood insurance markets would be struggling to keep their heads above water.

Decades of unchecked coastal development, particularly in Florida, have vastly increased the number of properties exposed to the risk of flooding, and the replacement values of those structures have skyrocketed. Under normal conditions, severe tropical weather poses an enormous financial risk to both property owners and insurers. Add in the phenomenon of higher tides and shrinking coastlines, and you have an unsustainable dynamic.

In the latest installment of “Rising Seas,” a Gatehouse Media project, reporters Dinah Voyles Pulver and Dale White lay out the three scenarios scientists project could occur by 2100. Even under the best case, researchers fear that nearly 20 Florida communities will experience sea-level rise. Under the worst case, that number would reach 90.

But even if those predictions don’t materialize, the current insurance market needs to change, because it’s been on a reckless course for years.

Because private flood insurance is difficult to obtain — many insurers don’t offer it — and expensive for those who do have it, the federal government has stepped in and provided coverage made more affordable thanks to it being subsidized with tax dollars. The National Flood Insurance Program currently holds over 5 million policies, or roughly 5 percent of all households in the country. That amounts to over $1.2 trillion in coverage.

The problem, as with most government-subsidized efforts to create artificially low prices, is that the program is not actuarially sound: Premiums paid into the system do not reflect the amount of financial risk that is incurred. A 2011 study by the Property Casualty Insurers Association of America found that NFIP coverage is, on average, half the price of comparable private coverage. Furthermore, NFIP by law cannot deny coverage to especially risky properties with histories of repeated extensive flood damage, so long as they are located in special flood hazard areas.

No wonder the NFIP is currently $25 billion in debt, due primarily to two huge events: Hurricane Katrina in 2005 and Superstorm Sandy in 2012.

Congress in 2012 passed reforms to the National Flood Insurance Program to put it on a more sustainable financial track. But that necessitated a sharp increase in premiums for many federal policy holders, who reeled from the sticker shock. The resulting political backlash forced lawmakers to retreat. In 2014 Congress rolled back some of the reforms, and delayed others, to once again keep costs down for constituents.

However, taxpayers who don’t own flood-prone property are constituents, too, and they shouldn’t be on the hook for a program that distorts the costs of insurance and the risks involved in building in flood zones. In so doing it creates a moral hazard — it reduces incentive for individuals to guard against danger, because the losses will be spread among other parties.

The NFIP is set to expire in September, and the House is considering reauthorizing the program for another five years. To their credit, lawmakers once again are pursuing major changes to improve its financial situation. These include ways to encourage more private insurance, moving the program toward actuarial-based rates and modernizing how the feds assess flood risks.

This time, Congress needs to stand firm. Any protests from policy holders ultimately will pale in comparison to the fiscal effects of being swamped by flood damage — with or without a significant rise in the seas.

The problem, as with most government-subsidized efforts to create artificially low prices, is that the [NFIP] is not actuarially sound: Premiums paid into the system do not reflect the amount of financial risk that is incurred.