Flood Insurance Subsidies Must Include Options to Lower Risk

People awaiting rescue after Hurricane Katrina. Source: Jocelyn Augustino/FEMA

The Federal Emergency Management Agency (FEMA) recently released a report describing how the federal flood insurance program could be reformed to provide low-income households affordable options for insurance coverage. Given the devastation that can be wrought by a flood, access to insurance coverage can make the difference between financial ruin and being able to rebuild. However, flood insurance does nothing to help a homeowner avoid flooding at the outset.

Flood insurance is just one of many tools for managing flood risk. But, if you live in an area that has flooded repeatedly in the past, or likely to be flooded repeatedly in the future, insurance just allows you to rebuild, then flood, then rebuild again.  To be truly effective, flood insurance must be coupled with actions to reduce one’s exposure to flooding. Otherwise, flood insurance can unintentionally trap low-income homeowners in a cycle of rebuilding in the same vulnerable location and the same vulnerable way, a growing problem that NRDC highlighted in its report Seeking Higher Ground.  

FEMA’s proposed reforms could help low-income Americans purchase insurance policies.  But any proposal for affordable insurance coverage must also include greater access to resources that can help low-income families get out of harm’s way, like grants for voluntary buyouts.

Poor Disproportionately Exposed to Flooding 

Currently, the National Flood Insurance Program (NFIP) provides older homes discounted insurance in comparison to newer homes built to be more flood resilient. While this subsidy was established to entice owners of older homes to join the program, it completely fails to provide an accurate depiction of flood risk or to help those who may be economically disadvantage. 

In contrast, the new report looks at how flood insurance premiums could be subsidized based on income status. FEMA’s research found that low-income households are less likely to purchase flood insurance than higher-income households, even though low-income families are more likely to live in high-risk flood zones.

*Low-income is defined as having less than 80% of the Area Median Income

FEMA found that more than 50% of households located in the 100-year floodplain that lack NFIP insurance coverage are considered low-income. whereas, only 26% of households located in the 100-year floodplain that have NFIP insurance coverage are considered low-income. Further, the median income of households without flood insurance is only $40,000, slightly more than half that of households located in the 100-year floodplain that have flood insurance. 

In comparison, only 41% of non-policy holders outside the 100-year floodplain are low-income, with a median income of $56,000. Such findings indicate that homeowners with a lower median income tend to live in higher risk flood areas.  With the average policy costing $1098 per year, those that can least afford to pay for flood insurance also can least afford to be without it given their high level of risk.

FEMA proposed three different ways Congress could provide subsidies to low-income families that would be directly linked to reducing the cost of flood insurance premiums. One would provide subsidies based on income level. For example, if a homeowner had an income below the Area Median Income (AMI), he/she could receive a certain percentage off their flood risk policy.  Another is to directly link household income to the price of the insurance policy. The homeowner would pay up to a certain cap and then FEMA would cover the rest. The third would consider a household’s cost burden, including mortgage, taxes, and insurance and would provide assistance when that burden rose above a certain percentage of the household’s income. Under all three proposals, FEMA would inform the policyholders of the full-risk price for the insurance policy to more clearly communicate the risk of flooding, one of the major shortcomings of the current way FEMA provides insurance discounts. 

Place Greater Emphasis on Mitigation.

While each proposal has its plusses and minuses, none of these are a long-term solution in the face of rising sea levels and escalating flood risks on inland waterways. The best approach would be to combine one of the proposals with much-needed assistance to lower people’s vulnerability to flood disasters.  Thus, a low-income household would not only be able to obtain affordable coverage, but could also reduce their risk of flooding in the first place. FEMA has recommended coupling one of the three affordability proposals with greater access to mitigation options, instead of an either/or approach. 

Cheap insurance does not protect one’s home from flooding, and as sea levels rise and extreme storms become more frequent, the risk of flooding is only growing.  Requiring greater mitigation assistance, in addition to more affordable insurance premiums, is an equitable way to assist low-income households.  Reducing a home’s exposure to flooding will not only better protect people and property, but could also reduce NFIP payouts in the long-run.  Plus, there is the added benefit that reducing risk also reduces the cost of insurance, or eliminates the need entirely, for the homeowner. 

About the Authors

Joel Scata

Water and Climate Attorney, Water Initiatives, Healthy People & Thriving Communities Program

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