The recent flurry of hurricanes hitting the US and subsequent flooding has heightened concern about the lack of flood insurance across the country, as well as its subsequent impact on the US economy, with an estimated 53% gap in flood coverage.
The cost to fix damage from Hurricane Helene in late September and Hurricane Milton in early October is expected to be in the tens of billions of dollars, and much of it will not be covered by insurance.
Many American homeowners do not realise their insurance policies exclude cover for flooding, while climate change has increased the number and length of extreme weather events and the chance of floods occurring. In states such as North Carolina, floods were caused by Helene’s heavy downpours yet very few people are able to claim for the damage to their homes.
“We only require people who live in flood zones to purchase flood insurance, and so many people who are living outside of those areas don’t ever even consider it. But in reality, a lot of people who flood don’t live in flood zones,” Andrew Rumbach, a senior fellow at the Urban Institute, told Green Central Banking.
The National Flood Insurance Program is a US programme set up in 1968 by the Federal Emergency Management Agency (Fema) in response to a lack of private flood insurance and is a separate policy from home insurance. While homes and businesses in designated high-risk areas with mortgages are required to have flood insurance, those outside high-risk areas can also purchase suitable policies.
Knowing exactly how many homeowners at risk of flooding have flood insurance can be difficult, as there is no centralised public data system. And with insurance being regulated on the state level, the system is fragmented. Researchers and advocates have been calling for data on insurance coverage to be made public, but so far collection is only voluntary and some major states have opted out, meaning there is a huge gap in data.
David Burt, founder and CEO of investment research firm DeltaTerra Capital, estimates that of the 3.1 million single-family homes in Fema-designated high-risk flood areas, roughly 1.6 million have flood insurance. But there could be as many as 3.3 million homes outside flood zone areas which are nevertheless at risk of flooding, he said. Of those, only 1.4 million have coverage, leaving an estimated gap of at least 3.4 million US homes at risk of flooding and yet are uninsured.
There is an insurance gap of almost US$30bn a year in overall homeowners insurance coverage.
The insurance gap has “really reached a point of fatigue”, according to Burt. By his estimates, there is an insurance gap of almost US$30bn a year in overall homeowners insurance coverage. That translates to about 18% to 20% of the US potentially underperforming by 20% to 30%, or roughly $1.2tn in add-to-value losses. For those communities, it might feel like the great financial crisis all over again.
“It depends on how gracefully, I guess, we can make those adjustments as to whether this escalates into something that’s damaging like the great financial crisis was,” he said.
Reforms needed at national level
The current system in the US means insurance is often the first line of defence when it comes to responding to natural disasters. But with insurance premiums skyrocketing and an increase in natural disasters, having homeowners’ insurance – let alone flood insurance – is becoming unaffordable for many.
“Fundamentally, the flood insurance programmes in the United States are broken,” Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said.
When a natural disaster hits, homeowners can get assistance from their insurer, Fema and the Small Business Administration, which gives out disaster loan funds. But with the increase in storms this year, those funds have run out.
Fema is also in debt and has had to borrow billions from the US government to pay for claims. In 2021, the agency revamped how it sets premiums for flood insurance, called Risk Rating 2.0, which has caused costs to rise for many. But some say the programme still needs to be reformed. The US Government Accountability Office has recommended that Congress set up a means-based assistance programme to help those who cannot afford coverage.
Rothstein said the US also needs to give more funds to Fema and other assistance programmes, as well as give incentives for homeowners to climate-proof their homes. For example, in some parts of the US prone to hurricanes, homeowners who harden their roofs can get a lower premium rate.
“We need the overall financial system to remain resilient enough to address the things that we have great uncertainties about when it comes to climate change.”
“We have to update and reform how insurance rates are set, and we have to build in more incentives for consumers and businesses to do more… we need to do more, we need to move faster,” he said.
Elizabeth Jacobs, a senior specialist at thinktank E3G, thinks there needs to be more urgency across all governments in addressing and protecting financial stability risks that could arise from a lack of insurance coverage.
“We need the overall financial system to remain resilient enough to address the things that we have great uncertainties about when it comes to climate change,” she said.
Addressing the insurance gap will not only help businesses stay insured but will also help the most marginalised people who are often hit hardest when disasters hit. Regulators, insurers and policymakers need to address the issue of flood and general homeowners insurance, or “those that are more marginalised will even be more disenfranchised through this transition”, Rothstein said.
The lack of flood insurance has been an issue for decades and climate change is merely exasperating the issue, said the Urban Institute’s Rumbach. The national flood insurance programme does not work well as it is underfunded and has been in need of reform for a while. Add climate change, and “it just further emphasises the need for large-scale policy reform”.
“We need to stop treating these events as these really rare things that happen only every once in a while, and start thinking about them as a sort of normal part of life in the US and having our financial systems account for them,” said Rumbach.
Featured photo: Hurricane Milton damage in St Petersburg, Florida.
