The NFIP favors the wealthy at the expense of lower income groups and taxpayers
New analysis demonstrates a disparity in the benefits of high-income and low-income groups participating in the NFIP.
Any remaining doubts can be put to rest. New analysis demonstrates a clear disparity does exist in the benefits realized by high-income and low-income groups participating in the National Flood Insurance Program (NFIP) — and contrary to some points of view, the nation’s lower-income NFIP participants are consistently disadvantaged when compared to higher-income participants.
My company, Poulton Associates, LLC, partnered with the geospatial digital data experts at HazardHub to analyze NFIP policy and claims data from 2010 through 2018. Through careful analysis conducted by their scientists, the data showed that the top three income groups examined (those with a household income of more than $106,000) accounted for nearly 50% of total NFIP claims, while the three lowest income groups accounted for just more than 15%.
At the same time, the analysis confirmed the census tracts containing the lowest one-third of the per-capita income group paid disproportionately higher premiums than the higher two per-capita income groups examined in each of the nine years analyzed.
From this analysis, one can clearly conclude the NFIP loss payments have benefited the wealthy much more than lower or middle-income households. Further, the NFIP is handing a substantial subsidy to the wealthy, while loss ratios continue to balloon in riskier areas with high property values where development continues to be encouraged by artificially low NFIP premiums. This is unacceptable for flood insurance buyers. It’s also unacceptable for taxpayers.
The facts are in
In early March, I had the opportunity to present this report titled “Beneath the Surface: Analysis of NFIP Data Demonstrates the Need for More Equitable Rates” during a panel discussion at a Congressional Briefing on Capitol Hill. Joining me were public policy experts Ray Lehmann of R Street and Steve Ellis of Taxpayers for Common Sense.
Among other topics, my fellow panelists and I discussed the fact that rates must be more equitable and that by not implementing fairer rates, the NFIP is encouraging people to live in flood-prone areas as well as encouraging further development in riskier areas.
The untenable long-term reality: Since its inception, the NFIP has borrowed nearly $40 billion from taxpayers. Total losses have amounted to more than $66 billion. This means taxpayers have funded nearly $.60 of every loss dollar paid out by the NFIP. Unless the NFIP corrects its rates to actuarily sound levels, this unacceptable trend will only continue.
Unfortunately, the report data determined rates are not going in a direction that will improve the current disastrous situation. In fact, HazardHub found that although the NFIP was mandated by the Biggert-Waters Flood Insurance Reform Act of 2012 to raise funds by raising rates, they have in fact allowed the cost of NFIP issued flood insurance to decrease for the last five years.
The HazardHub analysis found rates per $100 of insured value fell from $.28 in 2014 steadily to $.25 in 2018 (the last year for which data are available). Further, with the passage of the Homeowners Affordability Act of 2015, premiums held steady for lower-income homeowners, while premiums dropped for homeowners in the wealthiest census tracts.
What it all means
While the NFIP has been charging unjustifiable rates and incentivizing building in flood-prone areas, it has also implemented rules that have impeded the private flood insurance market from relieving the NFIP of some of its financial burden and enlarging the choices available to flood insurance consumers. It’s critical to understand the NFIP is key to a successful flood insurance solution, but it is not and should not be the only solution. The private flood insurance market frequently offers lower rates and more comprehensive coverage that greatly benefit flood insurance buyers and provides taxpayers with a well-deserved break.
The private flood insurance market will repair America’s flood insurance marketplace, but the NFIP must stop implementing rules aimed at stunting private market growth. Any internal NFIP rule or guideline, such as disallowing the resumption of a “grandfathered” rate for anyone wishing to return to the NFIP from the private market, that limits the flood insurance buyer’s ability to test the private flood insurance market runs counter to the intent of Congress, the interest of taxpayers and common sense.
The most egregious example of such counterproductive protocols is the NFIP rule against returning a policyholder’s premium when a policy is canceled prior to its expiration because the insured has decided to place their coverage in the private market. This rule has no logical reason to exist and is in direct contradiction to Congressional intent as indicated in the Biggert-Waters amendment.
To correct the continuing inconsistencies within the NFIP, either the executive branch or Congress must stop the NFIP from implementing measures like these. Further, it must ensure the proper implementation of the NFIP’s proposed new rating system, known as Risk Rating 2.0. Under Risk Rating 2.0 the NFIP would be implementing systems to more accurately determine flood risk, which would benefit all stakeholders.
In all, HazardHub’s findings demonstrate that the NFIP’s hold over the flood insurance marketplace has encouraged property development located in harm’s way, mostly by the wealthy, at a hefty cost to taxpayers. Congress originally created the NFIP with the intent that it would act as an insurer of last resort. If the NFIP had developed into a residual market by encouraging the growth of the private insurance market, many of the flaws in the NFIP highlighted by this report would have been disallowed by the invisible hand of the marketplace.
Craig Poulton is CEO of Poulton Associates, LLC, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATcoverage.com. He presented this report at a Congressional Briefing with public policy experts from R Street and Taxpayers for Common Sense on Capitol Hill March 2. Follow him on Twitter @nciptweets.
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