Policy Studies Insurance

Do No Harm: Managing Retreat By Ending New Subsidies


R.J. Lehmann
Former Director, Finance, Insurance & Trade; Former Resident Senior Fellow

Key Points

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. Climate change will exacerbate this problem, as sea-level rise turns what once were 1-in-100 year floods into 1-in-10-year or even annual floods.

Nationwide, 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. To remove incentives to build in flood-prone regions, the NFIP should no longer insure new construction in 100-year floodplains.

Investigations by several federal agencies confirm the NFIP’s maps are woefully out of date.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, the NFIP must end its practice of allowing properties to retain lower rates when assessments of their flood risk increases.

Press Release

R Street Institute: Stop encouraging development in flood-prone regions


The twin threats of climate change and sea-level rise have prompted an ongoing discussion of the concept of “managed retreat”—that is, whether to explicitly encourage the relocation of coastal communities and others facing unsustainable risks toward relatively safer locations by way of public policy. The 20th century saw mean global sea levels rise by between 11 and 16 centimeters, while most projections for the 21st century anticipate a sea-level rise between 50 centimeters (assuming immediate sharp cuts to global carbon emissions) and more than two meters (assuming breakup of the Antarctic ice sheet). More extreme projections place the increase at levels that would put 630 million people around the globe at risk of annual flooding by the year 2100.

Despite these projections, Americans continue to build extensively in severely flood-prone regions. A 2019 research brief produced by ClimateCentral in partnership with the real-estate website Zillow found that in eight coastal states there have been more homes constructed since 2010 in areas projected by 2050 to face an annual 10 percent risk of serious coastal flooding (a 10-year floodplain) than in all other zones combined. In Delaware, Mississippi, New Jersey and Rhode Island, these high-risk coastal zones have seen twice as much development over the past decade as relatively safer zones, while new construction in the 10-year coastal floodplain in Connecticut has been three times as fast. Nationwide, ClimateCentral projects that 17,800 homes built since 2010 will face at least 10 percent annual risk of severe coastal flooding by 2050, and 60,500 of them will face such risk by 2100

Such trends threaten the mission of the National Flood Insurance Program (NFIP), the federal program that has served as Americans’ primary source of flood insurance coverage since its creation in 1968. Historically, the NFIP has been a primary facilitator of building in flood-prone areas. It insures many properties that the private market would not and, in many cases, at rates that do not meet basic actuarial guidelines for sufficiency. Driven in part by the NFIP’s newly available flood coverage, in the 40 years after the program’s creation, from 1970 to 2010, the population of U.S. coastal counties grew by 50.9 million, a 45 percent increase. That period ended with coastal counties representing 52 percent of the nation’s total population.

The NFIP has also proven fiscally unsustainable as currently structured. The 1966 Presidential Task Force on Federal Flood Control Policy warned Congress that creating a federal program to provide “insurance in which premiums are not proportionate to risk would be to invite economic waste of great magnitude.” That warning has proved prescient. Over the dozen years from 2002 to 2013, the nonpartisan Government Accountability Office estimates the program collected $11 billion to $17 billion less in premiums than was actuarially prudent.

Reforms passed in 2012 were intended to place the program on a path toward long-term fiscal sustainability by phasing out explicit premium subsidies and shifting more risk to the private insurance, reinsurance and capital markets. Nonetheless, catastrophic claims from storms like Hurricanes Katrina, Rita, Wilma, Ike, Sandy, Harvey and Irma have forced the NFIP to borrow nearly $40 billion from the U.S. Treasury since 2005. Despite having $16 billion of its debt erased by Congress in 2017, the NFIP remained $20.5 billion in debt to U.S. taxpayers as of the fourth quarter of Fiscal Year 2019.

It is broadly understood that full repayment of that debt is infeasible, and the program’s debts are only projected to grow if the current structure remains in place. In a September 2017 report, the Congressional Budget Office estimated the NFIP’s average expected annual costs exceed its expected revenues by $1.4 billion.

In recent sessions of Congress, lawmakers have entertained a variety of proposed reforms to make the NFIP more fiscally sustainable, including raising the program’s rates, forgiving the remainder of its debt and making investments in mitigation and updated mapping. Each of these proposals has, in turn, faced political objections, including concerns about the budgetary impact of mitigation projects and debt cancellation, that higher rates could prove unaffordable and that updated maps could have adverse impacts on the economies of flood-prone regions.

In light of continued high levels of development in floodprone areas, even as sea-level rise and other effects of climate change are expected to make future flood risk even worse, this paper proposes two reforms that Congress should consider as it crafts a long-term extension of the National Flood Insurance Program:

  1. Rather than the current policy of extending coverage to any property in a participating community, the NFIP should ceasing writing insurance for new construction in 100-year floodplains.
  2. Going forward, the program also should end the practice of “grandfathering”—that is, failing to update flood insurance rates to reflect changes in projected flood risk—for any new structures that join the program.

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