The recent storms and floods affecting the United States and its Caribbean territories have spurred debate about the country’s National Flood Insurance Program (NFIP). The program’s ballooning debt is a threat to its financial sustainability. Another is its focus on rebuilding flooded properties – often multiple times – ahead of other flood mitigation options like relocation. Amid calls for reform, Congress is set to decide on the program’s future on 8 December.
Aither was part of the team that assessed and proposed flood risk mitigation options in the East Gippsland Floodplain Management Strategy (in draft). Our input to that process and current debate about the NFIP reveal the importance of accurate flood risk information for the use of flood insurance premiums as a signal about risk.
The NFIP was introduced to provide low-cost insurance to people whose homes were exposed to flooding. The NFIP essentially subsidises the cost of flood insurance, and some policy holders’ premiums are artificially low. This means that homeowners do not receive precise market signals regarding the full cost of living in flood prone areas. Low insurance premiums can provide a perverse incentive to homeowners to live, and in many cases, rebuild in high-risk areas.
Government subsidised flood insurance akin to the NFIP does not exist in Australia, nevertheless insurance premiums have not always reflected risk accurately. However private insurers are getting better access to flood risk data and are using this information to offer cover that discriminates between high and low risk properties. Rather than a one-size-fits-all approach, this means that more homeowners will be offered a policy with premiums tailored to risk exposure. The availability of flood risk information, including accurate and up-to-date flood risk maps, is critical to this. These products provide a great signal about the real cost of living in flood prone areas, which can inform home owners’ decisions about how they manage their risk.
In areas like East Gippsland that have a relatively low and disbursed population, the cost of physical mitigation options, such as levees, can be significant. Insurance will therefore always be an important option for managing flood risk, alongside information provision and community education. While insurance costs may be high in some cases, this need not always be bad. Alongside accurate information, it might just be an indication of the real risk of living in flood prone areas.
An unusual coalition of insurers, environmentalists and fiscal conservatives has joined the Trump administration in calling for fundamental changes in the program, including direct competition from private insurers. The fiscal conservatives note that the program was supposed to take the burden off taxpayers but has not, and environmentalists argue that it has become an enabler of construction on flood-prone coastlines, by charging premiums too low to reflect the true cost of building there.