Closing the Flood Insurance Gap

There is a large flood insurance gap in the United States, where many people exposed to flood risk are not covered by flood insurance. Early estimates suggest that very few people had flood insurance in areas flooded by Hurricane Helene, perhaps 1%-2% or less in inland counties and 21% in coastal counties affected by Helene.

The National Flood Insurance Program (NFIP) is the primary source of residential flood insurance. More than 22,000 communities participate in the NFIP, with more than five million policies providing more than $1.3 trillion in coverage. The NFIP identifies areas at high risk of flooding as Special Flood Hazard Areas (SFHAs). Property owners are required to purchase flood insurance only if (1) their properties are in SFHAs, (2) their communities participate in the NFIP, and (3) they have federally backed mortgages. However, the SFHA boundary may create a false belief that flood risk changes abruptly at the boundary and that properties outside the SFHA are safe and do not need flood insurance, but about 40% of NFIP claims are for properties outside SFHAs.

The issue of high uninsured losses is not a new problem. For example, in the October 2015 South Carolina floods, the average NFIP penetration rate in counties with a federal disaster declaration was 5% (Table 1). Nearly 90% of policies in South Carolina were concentrated at the coast, but the flood damage was primarily inland, where few residents were insured (Figure 1).

Figure 1. Residential Penetration Rates of NFIP Flood Insurance in South Carolina Counties with FEMA Individual Assistance Declarations for 2015 South Carolina Floods (DR-4241)

Source: Data for all figures provided by FEMA Congressional Affairs staff, November 6, 2017. Notes for all figures: Left: county-wide penetration rate; right: penetration rate for structures in SFHA.

In the 2016 Louisiana floods, about 17% of the flooded properties were insured. The 2016 floods were due to intense rainfall rather than coastal flooding, but NFIP policies were concentrated in a band relatively close to the coast (Figure 2).

Figure 2. Residential Penetration Rates of NFIP Flood Insurance in Louisiana Counties with FEMA Individual Assistance Declarations for 2016 Louisiana floods (DR-4277)

The flooding caused by hurricanes in 2017 further highlighted the issue of low numbers of insured flood victims, with particularly low penetration rates in Puerto Rico and the U.S. Virgin Islands. On average, 10% of flooded structures had NFIP insurance in the counties in Texas with FEMA Individual Assistance (IA) declarations for Hurricane Harvey. In the Florida counties with IA declarations for Hurricane Irma, 12% of the flooded buildings had flood insurance. In both Texas and Florida, penetration rates were highest at the coast (see Figure 3 and Figure 4, respectively). In contrast, many inland counties with a significant proportion of their area within the SFHA had low penetration rates despite the known flood risk.

Figure 3. Residential Penetration Rates of NFIP Flood Insurance in Texas Counties with FEMA Individual Assistance Declarations for Hurricane Harvey (DR-4332)

In the floods shown here, less than a third of the structures in SFHAs were insured. Although these structures may not have been covered by the mandatory purchase requirement, the extent of recent flooding suggests that residents in SFHAs might benefit from purchasing flood insurance voluntarily.

Figure 4. Residential Penetration Rates of NFIP Flood Insurance in Florida Counties with FEMA Individual Assistance Declarations for Hurricane Irma (DR-4337)

An insured flood victim is likely to recover more quickly and will generally receive more from NFIP insurance than from IA. Homeowners can get up to $350,000 for buildings and contents together, and renters are able to get up to $100,000 from an NFIP policy, compared to $34,900 for per household for housing assistance from the IA Individuals and Households Program (IHP). In addition, most disaster victims do not receive the maximum amount available from FEMA disaster assistance. According to FEMA, the average NFIP payout in calendar years 2016-2023 was $57,410 and the average FEMA IHP grant during the same period was $3,014.

The NFIP could achieve greater financial stability with a wider policy base and, in particular, through finding ways to increase coverage outside the SFHA. FEMA has identified the need to increase flood insurance coverage across the nation as a major priority for NFIP reauthorization, and this also forms a key element of FEMA's 2022-2026 strategic plan. FEMA's 2017 "moonshot" set a goal of doubling flood insurance coverage by 2023 through the increased sale of both NFIP and private policies. FEMA's view is that both the NFIP and an expanded private market will be needed in order to increase flood insurance coverage for the nation and reduce uninsured losses after the next flood.