Last Updated 01/31/2024
Issue: Floods are the most common and most destructive natural disaster in the United States. Ninety percent of all natural disasters involve flooding, and in 2021 all 50 states and the District of Columbia were affected by flooding. The damage from a flood is not covered under a standard homeowner's policy. Flood insurance is a special policy that is federally backed by the National Flood Insurance Program (NFIP) and available for homeowners, renters, and businesses. Based on a Triple-I survey conducted in 2020, approximately 27% of all American homeowners insurance policyholders reported having flood insurance
Background: The NFIP was created as a result of the passage of the National Flood Insurance Act of 1968. Congress enacted the NFIP primarily in response to the lack of availability of private insurance and continued increases in federal disaster assistance due to floods. At the time, flood was viewed as an uninsurable risk and coverage was virtually unavailable from private insurance markets due to frequent widespread flooding along the Mississippi River in the early 1960s. The NFIP is a federal program, managed by the Federal Emergency Management Administration (FEMA), and has three components: to provide flood insurance, to improve floodplain management, and to develop maps of flood hazard zones.
The NFIP allows property owners in participating communities to buy insurance to protect against flood losses. Participating communities are required to establish management regulations to reduce future flood damages. This insurance is intended to function as an insurance alternative to disaster assistance and reduce the rising costs of repairing damage to buildings and their contents caused by flood. A homeowner is able to purchase excess flood insurance, but they must be covered by NFIP flood insurance first. Information detailing how to obtain flood insurance can be found at www.floodsmart.gov.
Since NFIP's inception, additional legislation has been enacted to strengthen the program, ensure its fiscal soundness, and inform its mapping and insurance rate-setting.:
Additionally, Risk Rating 2.0 is the methodology used by the NFIP to price flood risk. Currently, flood risk is assessed on the property's elevation level and whether or not it is located in the 100-year floodplain. The methodology considers other factors, such as flood frequency, distance from a water source, cost of rebuilding, and different types of flooding (i.e., storm surge, river overflow), to give homeowners more individualized assessments. With the launch of the NFIP's Risk Rating 2.0 in the Fall of 2021, some experts predict 77% of NFIP customers will see increased rates. This price increase could incentivize customers to seek flood insurance elsewhere.
Private Flood Insurance
The private flood insurance market consists of 77 private companies that write 32.1% of flood insurance policies in the United States.
There may be advantages to selecting a policy with one of these companies, as they tend to offer higher coverage limits and optional coverage. Some companies may not require customers to provide an elevation certificate which could save time and money. Currently, the private flood insurance market is working toward providing customized coverage and simplifying claims processing by embracing technological solutions. Digital communications and the use of digital apps offer a faster method of communication that may be more appealing than working with government entities.
Status: Congress periodically reviews the NFIP. The program has had numerous short-term extensions and proposed reform measures. The NAIC and state insurance regulators support a long-term reauthorization of the NFIP to avoid short-term extensions and program lapses that create uncertainty in both the insurance and housing markets.
The NAIC's NFIP reauthorization recommendations for Congress also include encouraging growth in the private flood insurance market. Congress faces the challenge of trying to maintain a balance between improving the program’s financial solvency and reducing taxpayer exposure while also being mindful of affordability concerns.
In 2019 the NAIC Property and Casualty (C) Committee created a document with best practices for state insurance regulators to help facilitate growth in the private flood insurance market and the Catastrophe Insurance (C) Working Group continues to monitor market growth and assess relevant actions taken by individual states. Additionally, the newly created Climate and Resiliency (EX) Task Force will engage in discussions with the Property and Casualty (C) Committee on climate-related risk and resiliency issues, including dialogue among state insurance regulators, industry, and other stakeholders.
The NAIC has also placed increased focus on educating the public about potential damages and insurance claims related to floods. More details can be found under the Flood Insurance page through the NAIC's website.
