Why won't Congress fix flood insurance?

For decades lawmakers have ignored broad structural flaws in the National Flood Insurance Program, which underpins millions of home mortgages. And the problem is only getting worse.

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Below is a lightly edited transcript of the podcast:

KAREN: It must have been sometime just after midnight once the wind started picking up. We were on the floor, and the building shook. The building was shaking. The frame started coming up from the window.

JON PRIOR: This is Karen, a nurse at a hospital in Lake Charles, Louisiana, a city of about 80,000 people on the Gulf Coast, almost exactly between Houston and New Orleans. She and her colleague Christine preferred to be identified only by their first names because they weren’t authorized to talk about what happened the night Hurricane Laura made landfall in the early hours of August 27. Karen rode the storm out in the hospital to take care of some patients in the behavioral unit who had not been evacuated but were moved to inner rooms.

KAREN: We actually lost water a couple of hours before the storm really could hit. They never really explained to us what happened, but I think they were saying some pressure in the water system caused some pipes to burst so like all the floors were flooded. No water. We still have patients, not really able to adequately care for them at all. But our patients were OK. But I can’t imagine how these other facilities, even here I know we had a COVID unit open at that time. We still had critical care patients. I’m not sure how they did it.

PRIOR: Karen emerged from the hospital around 7 a.m.

KAREN: We, myself and a couple of other nurses who work here, we walked out there, and it was jaw-dropping.

PRIOR: Her colleague Christine, who had evacuated to New Orleans when she saw the storm had been upgraded to a category four, posted a brief video on Twitter of the damage in Lake Charles on September 8, some two weeks after the storm. A Dollar Tree they pass looks as though it had been turned inside out, and the scope of the wreckage is hard to square with news reports claiming the hurricane had not been as bad as feared.

TWITTER VIDEO: Unbelievable.

KAREN: The amount of destruction from this, from the storm, it’s like nothing I’ve ever seen before. I was kind of underestimating it as well because I had been through Rita. I remember Hurricane Andrew and a couple of others. I wasn’t ready. I didn’t expect what I saw.

PRIOR: Hurricane Laura has claimed 25 lives so far and what’s estimated to be up to $12 billion in damages, all as the COVID-19 pandemic continues to brew. Insurance companies, banks, policymakers and researchers are barely halfway through a hurricane season packed with so many storms that forecasters have turned to the Greek alphabet to name them. And scientists think hurricanes and coastal flooding are only going to get worse.
But there have been hurricanes before, and homes and businesses that are destroyed often get rebuilt, and that is in large part because of the national flood insurance program. But it’s becoming increasingly clear that that system has urgent shortcomings, and may have finally become too broken and outdated to ignore.

From American Banker, I’m Jon Prior, and this is Bankshot, a podcast about banks, finance, and the world we live in.

There are currently about 5 million policies in place through the National Flood Insurance Program, a decades-old program managed by the Federal Emergency Management Agency, or FEMA. The program provides more than $1.3 trillion in insurance coverage, and on September 30 — six days from now — the program’s Congressional authorization will expire.

That isn’t particularly unusual. Since the fiscal year 2017, lawmakers have scrambled to pass short-term reauthorizations of the program 15 different times, and may well do so again this time. But to understand why it’s so hard to pass a more comprehensive and long-term reauthorization of the flood insurance program, you have to go back to the beginning. This is Christine Klein.

CHRISTINE KLEIN: I'm Christine Klein and I'm a professor at the University of Florida Levin College of Law. Our current National Flood Insurance Program dates back to a law that Congress passed in 1968. So the basic idea is that we realized that state and local and private entities were incapable of dealing with the vast flood damage we had been experiencing. And this was all prompted by the 1965 Hurricane Betsy, which was our first billion dollar hurricane.

VOICE ON PHONE: Flooding now at Jackson Barracks.


NARRATOR: No one’s kidding. Betsy’s bringing in danger from a totally unexpected quarter. Her winds are pushing a 16-foot wall of water out of Lake Borgne on the Gulf, the greatest tidal surge in Louisiana history.

PRIOR: Hurricane Betsy tore through Louisiana, killing 76 people and flooding tens of thousands of homes. A national flood insurance program had been debated for years before that time, but the severity and price tag of Hurricane Betsy forced Congress’ hand. And the program they came up with worked like this:

KLEIN: So the idea is that the federal government would come in and provide some subsidized flood insurance. And in exchange, local communities would enact some strict land use controls. And it would just be a temporary measure until they have gotten construction guided away from the flood plains and people were safer and we were able to then let private insurance take over.”

PRIOR: In other words, the bill Congress passed in 1968 was never intended to be a permanent solution, but rather a bridge to a more comprehensive policy to discourage building in flood zones and coastal areas. But rather than a temporary fix, the federal flood insurance program has become a critical lynchpin allowing mortgage lenders, real estate agents, homebuilders and the rest of the housing industry to continue building in floodplains today. Klein published a study on the program’s 50th anniversary two years ago, laying out how years of setbacks have contorted the flood insurance program -- initially designed as a stopgap measure that would ultimately discourage construction in flood zones -- into a system that enables, and even encourages, development in places that pose the most risk.

KLEIN: The astounding thing I realized is we're not any safer, and we're not saving any money and we're not having less flood damage. And instead, you know, through some perverse combination of human nature and different incentives, we have more people and more housing units in the homes waiting along the coast. On the coast, for example, housing units have gone up 225% and the population of vulnerable areas is expected to go up by 140% by the end of the century, so we are not any safer and I think it's fair to say that NFIP is just not working.

PRIOR: And whereas the original purpose of the flood insurance program was to save the government money on rebuilding after natural disasters, the Congressional Budget Office estimates that the program runs a deficit of about $1.4 billion every year. For fiscal year 2019, FEMA reported the program operated at an even higher loss at $1.7 billion. For its part, the banking industry has long lobbied for clear Congressional guidance on flood insurance.

SARA SINGHAS: So, the big point for lenders and for homeowners too is it protects the collateral. The home is the biggest source of investment, biggest asset people will generally own in their lifetime and flood insurance provides that protection for them.

PRIOR: That’s Sara Singhas.

SINGHAS: Sara Singhas, and I’m director of loan administration at the Mortgage Bankers Association. I work on a range of issues, basically anything that comes up after a loan has closed. So, people have servicing issues a lot now with the CARES Act and the forbearances, a lot with the consumer protection requirements, but also flood insurance and disaster recovery is in my portfolio of issues.

PRIOR: To understand how federal flood insurance has become a vehicle for encouraging rather than discouraging development in floodplains, you have to understand how the program has evolved over the years.

SINGHAS: In the 1970s, the National Flood Insurance Act was amended to require that loans that would be federally backed on properties that were located in a Special Flood Hazard Area must have flood insurance. So lenders are required to ensure that all the properties have that level requisite flood insurance to the life of the loan. And back in 2012, the Biggert-Waters Act passed to also allow private flood insurance that meets certain criteria to be used to satisfy the mandatory purchase requirement. So it’s no longer only NFIP policies that can meet that requirement.

PRIOR: So because flood insurance is effectively required for new home construction in high-risk areas, the risks posed by that construction are no longer borne by the consumer or local authorities who make most land-use decisions. They’re borne by the taxpayer and offset by insurance premiums.

Those premiums covered losses for a long time, but when Hurricane Katrina hit New Orleans in 2005 — almost 15 years to the date before Hurricane Laura — the cost to the NFIP was more than $15 billion, putting the program fiscally underwater for the first time … pun intended. And the fiscal deficit posed by flood insurance has worsened since then, in part because premiums have not been able to keep pace with losses, and because there are more losses caused by more storms.

But despite its shortcomings, Singhas said federal flood insurance can’t simply go away because there’s no private flood insurance to speak of that could take its place at scale. But she said the program can’t continue to limp along as it is, either, and repeated short-term reauthorizations are getting in the way of a more fulsome policy debate about the future of flood insurance.

SINGHAS: I would say the absolute first and foremost major change that I would like to see is long-term reauthorization of the program. I mean, even if private flood insurance really takes over the residential side, there's still a need for the NFIP program, and Biggert-Waters was the last long-term reauthorization of the program. It reauthorized it from 2012 to 2017. But since the end of 2017, we've had 15 short-term reauthorizations, I think, and the program has lapsed a couple times. So now we're three years without having a long-term reauthorization. I’m not confident … the program comes up for expiration again, at the end of this month, it's September 30. So I'm not optimistic that we will see a long-term reauthorization. I'd say it's almost impossible now, but that that would be really important. Having that stability in the program, for at least five years is really important.

PRIOR: But even if Congress had the appetite to take on a longer-term reauthorization of the NFIP, there are important policy choices that lawmakers would have to make to keep the program functional and solvent going forward. And one of the most critical problems is deciding which houses require flood insurance and which ones don’t.

SINGHAS: Right now the flood insurance program requires homeowners who live on one side of the line, if they're in the Special Flood Hazard Area, they must have flood insurance. If they live on the other side of that line, they're not required under federal law to have flood insurance. And this has really set up an unfortunate misunderstanding and an underestimation of actual flood risk. Do you stand on one side of that line, you put your foot on the other, and, you know, floods don't stop by the line. So, unfortunately, the way that it has been set up with this special Flood Hazard Area being the line of demarcation of where insurance will be required, has left many people on the wrong side of that line without flood insurance. And we saw that, you know, like when Hurricane Harvey, about 80% of the homes that were substantially damaged, didn't have flood insurance and they were not required to. They were outside of that line. So I think, you know, a really important way to change the program would be to start moving away from that binary line and start talking more about flood risk as a continuum.

PRIOR: And it’s worth mentioning that when homes get damaged or destroyed by floodwaters and the owners don’t have insurance, the impact on the homeowner can vary dramatically. For wealthy people with second homes, the impact can be hard but manageable. But for poorer residents, it can turn their lives upside-down.

KLEIN: It's really important to think about who is living in flood prone areas, and sometimes it's poor people in low lying areas who don't have a choice. That's the least expensive real estate. At the other end of the spectrum is wealthy people who have second homes on the coast. Often they can pay cash for the property and they don't even need a mortgage from a bank, which is the mechanism by which the federal government requires people to get federal flood insurance if they need a federally insured mortgage. So I think it's important to have some compassion and to realize there are people that need assistance, and people that just need more disincentives to making unwise investments.

PRIOR: So if the federal flood insurance program isn’t doing enough to keep structures from being built in high-risk areas, and it doesn’t cover many areas that are already at risk of flooding, how can Congress step in and make the program work better? And is government insurance the only answer? Could private flood insurance companies step in and provide a better service? More on that after the break.

PRIOR: Flood insurance, like all insurance, is about pricing the risk of a catastrophic event. And few understand the fluid nature of pricing flood risk better than John Dickson.

JOHN DICKSON: My name is John Dickson. I'm the president of Aon Edge Insurance Agency. We are a specialty MGA focused on designing and delivering private flood insurance solutions that are meant to help reach homes in maybe different fashion than traditionally been insured through the federal flood insurance program. So right now we're writing on residential homes, roughly $50 million of premium on an annualized basis.

PRIOR: That means Aon has grown into one of the largest private flood insurers in the space. But it hasn’t been easy.

DICKSON: So in 2015, we sold our first policy in May of that year. In 2016, very early in our existence, we were hit by the historic floods in East Baton Rouge, and that knocked us back on our heels and we thought, “Wow, what a way to get out of the gate.” And then the very next year, we had to absorb Hurricane Harvey. And that completely knocked us down. And, you know, we're just now sort of recovering from the deficit created from … that was a massive event with respect to our size with time. We were at one point a nearly 200% loss ratio firm because of the size and the extent of Harvey.

PRIOR: Dickson says the National Flood Insurance Program has a split personality that’s often at odds with itself.

DICKSON: On one hand, it is operating as an insurance company, trying to responsibly sustainably price risk using numbers and traditional insurance risk management practices to underwrite and deliver value for all stakeholders, the program included. So that's one side, one side of that coin. The other side is a social assistance program. And the social assistance program is trying to, you know, maintain affordability, make sure that there's coverage everywhere. And sometimes those two interests are in conflict. And what I mean by that you think about severe repetitive loss properties. Mother Nature tells us time and again that we've built structures where structures don't belong, yet we build when they're torn down, and the NFIP promotes that behavior in some respects through the social assistance aspect of the program.

PRIOR: And it’s unlikely private insurers like Aon Edge will be able to step in to fill the affordability role the NFIP currently plays, no matter how much some members of Congress want them to.

DICKSON: I don't think private industry will ever be able to deliver the social assistance piece because that's, you know, in many respects the role of government. And as long as NFIP is going to continue to be part-social assistance program, yeah, private industry will not step into those shoes. Private industry is not going to, like I said, write severe private loss properties, not going to write in coastal barrier resource areas. There’s just risk sitting in the NFIP that … you know, those homes should not be there. And, you know, if you want to price them in the private industry, the premium is going to basically be the replacement costs to the property, which is not really tenable.

PRIOR: But there is some precedent for a federal role in reforming insurance markets. When Hurricane Andrew blew ashore on the Florida coast in 1992, most private insurers stopped offering wind insurance in the state because they couldn’t quantify the risk. The government stepped in and made massive investments to build models that let insurers better understand the destructive path of cyclones and hurricanes, and Dickson said the market is robust again. Flood insurance, however, still relies on flood lines written decades ago. He suggests getting rid of them, throwing out the system, just like after Andrew.

DICKSON: So the government-sponsored entities Fannie, Freddie, Ginnie are the predominantly … the second market for ... for buying mortgages, have come up with just a massive list of regulations and rules around flood insurance and what's required and what's not. And that's what spawned these mandatory purchase flood zones. To me, the thing that I would do is do away with these dated lines on maps that decide who must buy and who must not buy.

PRIOR: FEMA has anticipated this challenge, and a new rule known as Risk Rating 2.0 is slated to go into effect next month. That rule takes in a variety of factors beyond whether a home sits on one side of a line or another to determine each property’s unique flood risk.

SINGHAS: It would be you know, a much more comprehensive look at that actual property, the elevation, the, you know, future climate impacts taking into account the type of building material and the how far the property is from the water source, elevation, you know, really comprehensive look and again, the Risk Rating 2.0 is factoring in these additional factors when they are when they calculate the new rate. So that's wonderful, but it would be great to also translate that to the requirement to purchase flood insurance and, you know, even expand it beyond the line where we currently have it drawn.

PRIOR: But even with a more nuanced system to determine flood risk and a better way to price it, there is no ability to address a growing concern that some homes are being built where they shouldn’t be, and there is no will to divert resources to relocate those who already live there. Here’s Christine Klein again.

KLEIN: The language, I guess, among academics is “managed retreat.” And, of course, I don't think you could get a single politician who would be willing to utter those words. So we know what we need to do, either we need to wall off the whole country from all possible flood waters, which is just not feasible, or we're gonna have to retreat, and it might be one house at a time is abandoned. I'm in Florida, there's a house at the end of the dirt road where I went to testify before the city council that they should not allow more development on that parcel, and sure enough, a house on the end of that road got flooded out. And it's been abandoned for three years. And I saw the homeowners canoe away from the house and just left it. So we are going to retreat one way or another from property. So it would be much better if we could plan more.

PRIOR: A bill that would reauthorize the program through fiscal year 2024 passed the House Financial Services Committee last year but has yet to be taken up by the full chamber. That bill, which was supported by the National Association of Realtors, would include some reforms to the program, such as expanding the program’s mapping capacity. There are some other proposals that have been introduced in the Senate, but those have not come up for a vote, either. The program, like many federal programs, is caught in the middle of a political tug-of-a-war between Democratic and Republican lawmakers over how responsible the federal government should be for rebuilding flooded homes, whether more private insurers should take over that role, and how to keep premiums affordable. Rep. Garret Graves, a Republican from southern Louisiana, voiced his frustration during a scramble to reauthorize the program -- in 2018.

REP. GARRET GRAVES: We have been myopically focused on flood insurance and flood insurance policy and thinking about the fiscal irresponsibility of continuing to allow this program to run the debt that it has while completely ignoring the fact that we have spent $1.5 trillion on 220 disasters since 1980, ignoring the fact that thousands and thousands of lives have been lost as a result of our lack of bringing an offense to the table and actually bringing resilient projects to the table and just focusing solely on flood insurance, which is a reactive policy. It’s fiscally irresponsible. We need to bring an offense and a defense to the table. This program needs fundamental reform, but we cannot do it just by cutting checks to people every time there’s a disaster. We’ve got to bring resiliency measures to the table as part of a package deal here.

PRIOR: After Graves’ speech, the House reauthorized the flood insurance program -- for six months. If the political conversations and concessions around federal flood insurance are unpalatable today, they are nonetheless becoming more and more urgent because of the heightened environmental risks posed by climate change.

JOEL SCATA: I'm Joel Scata, I am an attorney with the Natural Resources Defense Council. My background is in environmental law. And I focused on primarily climate resilience, and advocating for federal and state policies that can help communities throughout the United States become better-prepared for the impacts of climate change.

PRIOR: Scata said homeowners and lenders in some areas are caught in a cycle of getting flooded out, rebuilding, moving back in only to get flooded out again. And the constant recurrence of this cycle has put a strain on the national flood insurance program it wasn’t designed to handle. The NFIP is forced to borrow money from the U.S. Treasury to fill the deficit gaps caused when the premiums it charges don’t keep up with an increasing number of claims caused by an increasing number of storms. We’ve discussed how the application of flood zone maps can be arbitrary, but the other problem here is that the maps are based on past experience with flooding — experience that climate change is making increasingly irrelevant.

SCATA: I believe in 2017, the Inspector General for the Department of Homeland Security, did a survey of these flood maps and found that over 50% of them were out of date, meaning that they were older than five years and some of them were older than 10-15 years. And that's a significant problem because it assumes then that flood risks are static. But climate change is sort of a wrench in the gears of that approach, with the way the flood maps are kind of designed is that they look at historical averages of flooding. And so by time they're designed, they're like a snapshot in time. But they don't look to the future of flooding, especially in terms of future hydrology. And with climate change coming into play, we're going to see bigger rain storms and rising sea levels, changing sort of the flood dynamics of the region. And so houses built according to the floodplain of today is not going to be prepared 30 years from now, for the floodplain of tomorrow.

PRIOR: It’s not often that environmentalists, banking and private insurance industry representatives agree on an issue. But flood mapping is one of them. And for Scada, reforming the National Flood Insurance Program could be a vehicle through which Congress finds the same urgency too.

SCATA: The National Flood Insurance Program has the potential to be the linchpin of the nation strategy is reducing flood risk. And it really needs to achieve that by placing more emphasis on mitigating flood risk, rather than just rebuilding after a flood occurs, and by placing more emphasis on mitigating flood risks, such as adopting stronger and safer building land use codes, requiring that future flood maps have sort of a forward-looking advisory layer. So that wouldn't affect someone's insurance rate, but it will let them know that, “Hey, 30 years from now you might be flooding,” and then also providing greater mitigation assistance. There's only so much that they can do themselves. That really comes down to Congress needing the act. And Congress just needs to bite the bullet and do what's best. And if they can do it with other measures, such as, you know, passing out these major recovery packages and response to COVID, then they really need to start recognizing they're going to have to do that for climate change in batches.

KLEIN: You know, just from a banking perspective, if you have the average 30 year mortgage, and if a bank extends that mortgage for a home in the current 100 year floodplain, there's actually a 26% chance that that home, that collateral, will flood during the life of a 30 year mortgage.

PRIOR: Flood insurance isn’t at the top of the Congressional agenda right now -- there’s a pandemic, an economic recession, raging wildfires and the immediate consequences of Hurricanes like Laura to deal with. But those problems have something in common, which is that they are, at least to some degree, foreseeable. And they demonstrate something else, which is that while tragedies can hit anyone, they hurt the poor and marginalized communities the hardest. Just ask Karen and Christine, the nurses from Lake Charles.

KAREN: We're just for ourselves, or at least half of us are we the government needs to start worrying about the people, not big business. The government needs to worry about the people that actually make this country run. Without the little people the country does not work.

SCATA: Floods, and severe storms are occurring with greater regularity in the United States. And people are suffering, they are losing their possessions, their homes are getting flooded. They have to go through the process of repeatedly rebuilding after those events occur. And there is a growing recognition that something needs to be done. Congress has the power to make that change and Congress needs to act.