The threat of sea-level rise should force policymakers to rethink policies that encourage development in flood-prone regions. One place to start is with the National Flood Insurance Program (NFIP), according to the Washington, D.C. free market think tank R Street.
In a new policy study, R Street Director of Finance, Insurance and Trade R.J. Lehmann proposes that the NFIP should cease writing coverage for new construction in 100-year floodplains and that NFIP rates for any new construction should be adjusted to reflect future changes in assessments of flood risk. The study is entitled, Do No Harm: Managing Retreat By Ending New Subsidies.
Lehmann argues that the NFIP is fiscally unsustainable. Despite billions of dollars in prior bailouts, it still owes $20.5 billion to U.S. taxpayers, and its average expected costs exceed its expected revenues by $1.4 billion a year.
The report says that climate change will exacerbate the financial problem, as sea-level rise turns what once were 1-in-100-year floods into 1-in-10-year or even annual floods.
He finds that new development has grown faster in 100-year floodplains than outside of them, while in several coastal states development in areas projected soon to be 10-year floodplains has grown faster than in safer areas. Thus he proposes that to remove incentives to build in flood-prone regions, the NFIP should no longer insure new construction in 100-year floodplains.
He points to investigations by several federal agencies that confirm the NFIP’s maps are woefully out of date. Moreover, sea-level rise will require even more extensive changes to those maps in the future. To keep pace with those updates, for all new construction, Lehmann further argues that the NFIP should end its practice of “grandfathering,” or allowing properties to retain lower rates when assessments of their flood risk increase.
Lehmann concludes that “these recommendations offer an important step in what will be an evolving discussion of how to respond to climate change and sea-level rise. Where we can discourage flood-prone land from being developed without laying any new burden on current residents, we simply must take that opportunity.”
In a brief email exchange with Insurance Journal, Lehmann expanded on his recommendations:
IJ: Is the goal of your proposals more to get flood risk off the government’s back than it is to stop development in high risk areas?
Lehmann: The goal is to stop providing incentives to build in flood-prone areas, which the NFIP historically has provided. Doing so also is essential to get those risks off the government’s balance sheet and the tens of billions of debt the program has rung up is evidence that the program has not done a good job thus far of mitigating risk. And it’s also a proposal made in the context of a political process where the affordability concerns of those who already live in such areas must be taken into account. There is no argument to be made that you’re pricing people out of their homes if those homes do not currently exist.
IJ: Should there also be restrictions of private flood insurers? Do you trust private insurers’ risk underwriting will avoid such properties?
Lehmann: We expect that profit-motivated private insurers would be particularly concerned about risk-based rates, and that those prices would motivate decisions about development. But further land use restrictions are likely appropriate in some areas. As conservatives, we leave it up to local communities to determine what the most appropriate land use restrictions are. Our first priority, as the title of the paper suggests, is to do no further harm with taxpayer-funded subsidies.
What are the chances of Congress giving NFIP the funds it needs to update its mapping?
Lehmann: There are significant investments in mapping called for in both the House and Senate reauthorization bills, so that does appear to be one area where there’s relative consensus. Whether any NFIP bill can pass in an election year is a different story.
If your proposals were to be adopted, how would you describe the mission of the NFIP that would remain?
Lehmann: It would still be an important source of risk management and financial protection for millions of policyholders, including owners of older construction in 100-year floodzones. And it should still look to ensure that anyone who faces flood risk — which exists anywhere it rains — are aware of the potential protection gap they face in standard homeowners insurance policies.
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