Poorer Americans Dropped Federal Flood Insurance When Rates Rose

When the US Federal Emergency Management Agency overhauled rates for millions of homeowners in the National Flood Insurance Program (NFIP), in 2021, the goal was to end decades of underpricing and to align premiums with real flood risk, driven higher by climate change. Critics warned, however, that higher, more honest prices could push homeowners — particularly poorer ones — out of the program and potentially leave them without an emergency safety net.

A paper published Tuesday in the Journal of Catastrophe Risk and Resilience finds that those concerns have materialized. It estimates that Risk Rating 2.0, FEMA’s 2021 update, resulted in up to 13% of those facing the highest premium increases dropping their policies.

“Risk Rating 2.0 was designed so that flood insurance pricing could reflect property-specific flood risks,” said lead author Jesse Gourevitch, an economist at the Environmental Defense Fund. “Our findings show that rising premiums are also driving many households — especially those with lower incomes — to forgo NFIP coverage.” The study did not look at whether homeowners who left the program sought other options, like private insurance.

Most US homeowners insurance policies don’t cover flood damage, and the federally subsidized NFIP accounts for nearly 90% of residential flood coverage. The program was created in the 1960s to make flood insurance more accessible. But by charging premiums below actuarial rates, it accumulated roughly $20 billion in debt to the US Treasury, and it failed to stop development in high-risk areas.

The Trump administration has assembled a review council to consider how to reform, downsize or close FEMA altogether, which could affect the future of NFIP.

Risk Rating 2.0 uses industry-standard catastrophe models to price property-specific flood risk. After its implementation, some homeowners saw their premiums go down, but many faced steady increases — capped at 18% a year — until they were paying full risk-based rates. New policyholders had to pay the full rates immediately.

Although the reform sends clearer market signals about flood hazard, it also risks lowering the nation’s already scant flood-insurance coverage. Enrollment in NFIP has actually been declining since 2009, when it peaked at 5.7 million policies. That level is currently under 4.7 million. While the private flood insurance market has grown to fill some of the gap, FEMA estimates that only about 4% of American homeowners carry flood insurance.

FEMA didn’t respond to a request for comment on the paper’s findings.

“Flood remains the most under-insured physical risk in the US,” according to Firas Saleh, who oversees North American flood models at Moody’s Corp. and who wasn’t involved with the study. Washington state recently experienced major river flooding that forced more than 100,000 evacuations; NFIP has fewer than 30,000 policies statewide, Saleh noted.

The decline in uptake comes amid soaring property insurance costs nationwide, driven by inflation and an increase in climate-intensified natural disasters. Because NFIP enrollment was already falling before Risk Rating 2.0, the study aims to isolate how much of the post-2021 decline could be attributed specifically to the reform — data that FEMA does not track directly.

Using FEMA policy transaction data, the authors applied statistical models to compare Zip codes facing large expected increases in premiums with those facing smaller changes. Segmenting data into quartiles, from lowest to highest premium increases, they found a decline in new policies ranging across the quartiles from 11% to 39% and a 5% to 13% decline in existing policies.

They then further analyzed the results, segmenting them into quartiles by Zip code wealth. Across all the segments of premium increases, perhaps unsurprisingly, it was those in the lowest-income Zip codes who were most likely to drop a flood policy or not pick it up in the first place.

The authors of the paper conclude that, although the NFIP reforms have some beneficial effects, policy makers should take steps to stop the decline in coverage. One option is means-tested subsidies; another is more investment in risk reduction, such as local flood-control measures.

Photo: Floodwaters from Hurricane Idalia surround a home in Crystal River, Florida, in August 2023. Photographer: Christian Monterrosa/Bloomberg

Topics Flood