Will the NFIP’s new flood risk model solve the insurance gap?

In the Media

6 min read · Mar 23, 2021

By now, the progression of intensifying weather events is old news and made evermore apparent as each New Year brings new, worst-ever catastrophe seasons.

In different corners of the world, tornados churn, typhoons swirl, hurricanes rage, wildfires blaze and floodwaters rise in communities both in and out of designated flood zones.

The 2020 Atlantic hurricane season proliferated these trends as it logged 30 named storms, including 13 hurricanes — the most active season on record. These events caused roughly $65 billion in damages, nearly half of which was caused by flooding, AccuWeather reports. It follows that the U.S. is battling weather trends on several fronts in its effort to mitigate the rising toll of natural disasters in general and flooding in particular.

Midway through the 2020 season, the National Flood Insurance Program (NFIP), which was created by Congress in 1968 to cover and reduce flooding damage by regulating flood-plain development, received its 27th short-term extension in under a decade.

Meanwhile, the rollout of a long-awaited redesign to its risk rating system, now referred to as “2.0,” was pushed back a year with no guarantee the new October start date will happen.

Each year, as yet another expiration date looms, pleas from the insurance industry, homeowners, and regulators for reform and long-term reauthorization seem to fall on deaf ears.

Will 2021 be any different?

The education void

In a 2020 survey, 63% of respondents believed they were at no or low risk of flooding, when in reality, the number of U.S. homes at moderate to extreme risk is roughly half, according to Neptune Flood. Neptune Flood’s Consumer Survey of Flood Awareness conducted illustrated the depth of the protection gap, as one-third of respondents were unaware they were in a flood zone.

“The results indicate that the low level of demand for flood insurance is largely driven by a misunderstanding of risk, lack of knowledge of cost, and confusion around private versus government flood insurance,” says Jim Albert, Neptune Flood co-founder and board chairman.

Albert joins many other voices in the insurance industry who say educating consumers about their actual flood risk is the first and biggest step in bridging the protection gap. The industry has been focused on this for years as insurers continue to explore new ways to reach people.

“One of the biggest challenges is still understanding that there is an option other than the NFIP,” Albert says. He views the flood coverage gap as a major opportunity for the real estate industry.

“The first person to touch a homeowner and have the opportunity to discuss insurance is not an insurance agent,” Albert says. “It’s a real estate agent. So the real estate industry is instrumental in this education effort.”

The second biggest challenge, Albert says, is closing the coverage gap for commercial businesses. Roughly half of the homes in the U.S. are at moderate to extreme risk, and that same percentage of commercial businesses are at risk.

“Lenders are pretty aggressive in forcing people to have flood insurance in the high-hazard areas,” Albert says. “There’s not the same level of mandatory requirements for commercial properties, but they have the same proportionate risk.”

Of the roughly 5.5 million flood insurance policies active in the U.S., only about 500,000 are held by private insurers, according to the Congressional Research Service. The rest, or roughly 90%, are administered by the NFIP. Insurers report that many consumers are still largely unaware of their flood insurance options. Private flood insurance options have been on the market for years and offer consumers diverse policy and protection options. But there’s one key problem: Consumers aren’t interested.

“Nationwide, about 60 million households are at moderate to severe risk of flooding and should have flood insurance,” says Neptune Flood CEO Trevor Burgess. “That’s half of American households.”

Wright Flood President & Chief Program Advocate Patricia Templeton-Jones agrees. “Couple that information with the $78 billion in flood-related damages the U.S. has endured in the last 30 years, and it is immeasurably disconcerting that more property owners are not protecting their assets against the financial perils of flooding,” Templeton-Jones says.

Flood insurance experts say that one problem with the NFIP, which falls under the jurisdiction of the Federal Emergency Management Agency (FEMA), is that the program assesses risk and subsequently determines pricing based on outdated floodplain maps.

“The system used for homeowners to determine their flood risk, the FEMA flood map, is antiquated and doesn’t accurately reflect risk,” says Private Risk Management Association (PRMA) Executive Director Lisa Lindsay. “Homeowners have been misled into believing that their homes are safe, when in fact they may not be.”

The federal program has not been amended since 1973, says longtime insurance consultant Paul Hearn, managing member at Baralmar Advisors LLC. It is long overdue for reform and final reauthorization.

Another NFIP expiration date is set for September of this year. Hearn is not alone in hoping program administrators are able to roll-out “Risk Rating 2.0.” Critics say the modeling upgrade won’t do much for the country’s persistent protection gap. Others note that NFIP shortcomings are part of a larger, more complex problem.

“Looking at an increase in inland flooding and weather-related events, there’s a much bigger issue than the NFIP,” says Kate Friis, senior vice president at Marsh Private Client Services. “Reform means rating correctly, but how do you do that while also balancing out the affordability factor?”

NFIP reform also may not go far enough in terms of addressing the impact of climate change.

‘Too little, too late’

Under FEMA’s current system, flood insurance rates are calculated based on whether a home stands in a designated flood zone. Insurance professionals report there are two major problems with this approach.

First and foremost, outdated FEMA flood maps fail to accurately reflect the current flooding risk faced by communities nationwide. The second issue? Within the current designated flood zones, the owners of lower-value homes are paying proportionately more than policyholders who inhabit higher-value homes because higher-valued properties are more likely to hit the NFIP’s $250,000 insurance cap. Risk Rating 2.0 would reportedly change that by assessing properties and calculating rates individually instead of by flood zone.

This “massive and necessary undertaking” to redesign the federal government’s flood risk rating system incorporates “best practices and technology to better assess a property’s unique flood risk and corresponding premium rates,” Templeton-Jones says.

A path forward

Increasing awareness about flood risk and insurance needs among consumers is just part of the solution to closing the coverage gap.

“Structurally, something else needs to be done,” Albert says. “We need to go from 5.5 million insureds to 20-25 million and beyond, and the only way that’s going to happen is by doing things differently.”

Given the increasing threat of climate change-related storms, part of the solution may be a stronger flood insurance mandate. The government currently requires homes and business owners with government-backed properties in Special Flood Hazard Areas (SFHAs) to carry flood coverage.

Hearn believes stepping up this mandate could help. He adds that while property owners should retain the right to decide whether to purchase coverage or not. He also supports legislation that would make it mandatory to present a property buyer with flood projections and coverage options prior to closing.

Providing consumers with such cost breakdowns will “make it very easy for the consumer, not only to understand the risk but also implement action to hedge that risk,” Hearn says.

Another reason to be hopeful: Technology is changing the way the insurance industry understands and measures risk. Innovative property protection tools also empower consumers. For example, Realtor.com, the real estate listings website, recently added a feature called Flood Factor™, an online risk visualization tool developed by the First Street Foundation.

Now property listings on Realtor.com include both the FEMA flood risk-model rating, which covers a general area, and an individual Flood Factor™ risk score for the actual property. Flood Factor™ takes into account the past, present and future flooding risk for the property by identifying historic threats from rain, rivers, tides or storm surge. The site also offers an on-the-spot insurance quote from Neptune Flood.

The challenges around bridging the flooding coverage gap may seem overwhelming, but many in insurance believe the industry is well-poised to effect change.

“As an industry, we have a lot to feel good about,” says PRMA’s Lindsay. “We’re educating consumers every day and helping them understand their true flood risk… We just can’t stop having the conversation.”