Study Unveils Target Areas for Flood Insurance Policy Sales

But Selling More Policies in These Communities at Subsidized Premiums Could Sink Federal Program

There are a number of communities across the country where more flood insurance policies should be sold given their populations and flood risk. They include dozens of counties that have had multiple floods but are not part of the federal flood insurance program.

The “Catch-22” for policymakers is that while the communities may need the coverage, selling more policies in these areas would likely add to the losses that undermine the financial stability of the national program. That’s because the premiums charged would not reflect the actual risk in these communities and would be subsidized, unless Congress changes the pricing formula.

The U.S. Government Accountability Office (GAO), which researches issues at the request of members of Congress, recently reported on the current subsidization of federal flood insurance premiums and options for reducing this subsidization. The GAO noted that while it constitutes a declining percentage of all National Flood Insurance Program (NFIP) policies, the number of properties receiving subsidized premium rates has grown since 1985; by 2007 it was at its highest point in almost 30 years. The Federal Emergency Management Agency (FEMA) attributes this growth to several factors, including a growing number of mortgages with mandatory flood insurance, the longer-than-expected life of the structures that are eligible for subsidies, increased awareness of the dangers of floods from several major recent disasters and increased NFIP marketing efforts.

According to the GAO, more than half of the subsidized policies are currently concentrated in five states with relatively high flood risk: California, Florida, Louisiana, New Jersey and Texas. Current low participation rates—around 50 percent of single-family homes in high-risk areas—leave room for substantial growth in the number of NFIP policies, many of which would be likely to receive subsidized rates.

The policies receiving subsidized rates have been a financial burden on the program, with total claims exceeding premiums by $962 million from 1986 through 2004, before the large losses from the 2005 hurricanes.

In reforming NFIP, Congress is expected to evaluate the impact of subsidized premium rates and of actuarially honest premium rates.

GAO identified places (see story) where sales of flood policies appear to lag behind the need; that is, areas of the country that appear to have higher populations and flooding risks relative to their policy volumes when compared to other areas, and thus have the potential for increases in the number of NFIP policies. Of course, an increase in market penetration would likely bring an increase in the number of subsidized policies, GAO noted.