The National Flood Insurance Program is Unsustainable and Regressive

In the ten days between September and October 2024, two catastrophic hurricanes, Helene and Milton, battered the southeastern United States.

 Insurance claim payouts related to Hurricane Helene are projected to total between six and seven billion dollars. Claims stemming from Hurricane Milton are estimated to increase by 30–50%. As of December 2024, the National Flood Insurance Program (NFIP) had $3.441 billion in funding to cover these claims. The NFIP must increase its treasury debt or find an alternative solution to address the funding deficit to stay afloat. President Biden acknowledged this in a November 18th letter urging Congress to cancel some or all of NFIP’s debt to ensure a “sustainable flood insurance program.”

The NFIP was established in 1968 in response to the withdrawal of private insurers from the flood insurance market, aiming to reduce future flood damage and assist property owners in recovering from flooding. However, the program has been flawed from the start. The key task force report used to create the NFIP warned that “for the federal government to … provide insurance in which premiums are not proportionate to risk would be to invite economic waste of great magnitude.” Despite this, the NFIP began with heavily subsidized rates that have persisted to the present day. Any previous attempts to return premiums to risk-based values have been stopped or repealed under pressure from various interest groups.

 The federal government is again patching an already unsustainable flood insurance program with more unsustainable practices. The NFIP was never intended to serve as a profit center. As billion-dollar hurricanes continue to strike the United States, especially in previously ‘hurricane-safe’ areas, often worsened by increased rainfall due to climate change, congressional debt relief cannot be the only action taken by Congress. As long as the NFIP’s risk and relief calculations of the NFIP remain flawed, it encourages risky behavior and misallocates relief, causing the Program to continue failing in preparing the United States for the increasingly severe storms of the future brought on by climate change.

The NFIP operates like traditional insurance: in addition to government funding, its primary source of income comes from premiums paid by policyholders. In the private insurance market, an insurer’s total premiums are meant to exceed the total amount paid out in claims. NFIP is not designed to make a profit, yet the vast gap between revenue from premiums and claims paid reveals a fundamental issue with its structure.

Homeowners who purchase flood insurance do not assume the full risk of living in storm—and flood-prone areas. On one hand, this may be considered acceptable; according to the Congressional Research Service, one of the main goals of the NFIP is to “[allow] for the transfer of some of the financial risk of property owners to the federal government.” However, at a certain point, the risk transfer becomes regressive.

Who benefits from the risk transfer to the federal government, ultimately funded by taxpayers? Those who live, own, and develop properties in high-risk flood areas are the ones subsidized by the government. These residents would not otherwise choose to live in these locations due to the high potential costs of flood damage. In wealthy coastal areas, the NFIP functions as a regressive form of taxation. Funds are redistributed from federal taxpayers who do not reside in flood-prone regions to those who do, facilitating the rebuilding of high-value vacation homes and luxury developments.

 Data from the Congressional Budget Office indicates that second homes—often used as vacation properties or rentals—receive an increasing share of NFIP funding. Compared to communities with mainly primary residences, those consisting of secondary homes were nearly twice as likely to hold an NFIP policy and more likely to benefit from premium discounts, and these discounts were more likely to remain without an expiration date.

 One example of this regressive distribution—highlighted in journalist Gilbert Gaul’s book Geography of Risk—is Dauphin Island, Alabama, which was severely affected by Hurricane Katrina in 2005. From 2005 to 2017, homes on Dauphin Island, which has a population of only 1,793, received over $50 million in NFIP payouts. The average home value on Dauphin Island is $477,217, compared to the average home value of $226,118 in Alabama. 

 Homeowners in the U.S. have good reason to expect government relief: Gaul writes in Geography of Risk that in 1950 the federal government paid approximately 5% of hurricane damage costs, but this figure rose to about 70% by 2012. Researchers at the Leibniz Institute for Economic Research found that this increase in relief serves as a perverse incentive to build in high-risk areas, shifting the burden of rebuilding onto all taxpayers. Furthermore, once the floods occur, residents are not changing their behavior. Since the inception of the NFIP, the program has paid approximately $12 billion—one-fifth of its total losses—to properties that have filed more than one flood insurance claim.

There is also a mismatch in measuring flood risk, which directly impacts risk perception and coverage enrollment. Under the CBO’s definition of high-risk, which includes areas not identified as SFHAs on FEMA’s flood maps, only 8% of high-risk properties have flood coverage. Although FEMA’s Flood Insurance Rate Maps (FIRMs), intended to define the high-risk areas where flood insurance is required, identify SFHAs, according to the Congressional Research Service, “there is no consistent, definitive timetable for revising and updating FIRMs for a particular community.” In addition to some maps being outdated, FIRMs also do not include flood risk related solely to rainfall — meaning FIRMs exclude the type of flooding caused by Hurricane Helene in North Carolina.

  FEMA urgently needs to provide more accurate flood relief maps and consider risks beyond coastal flooding. These updated risks must also be communicated more clearly through increased premiums and higher developer costs. Groups such as the Government Accountability Office (GAO) and the Congressional Research Service (CRS) have proposed various methods for means-adjusted premiums. Instead of the current property-based discounts, means-adjusted premiums could offer affordable insurance to low-income households while still raising premiums to reflect risks for higher-income households and/or secondary and vacation homes.  This approach would create a more progressive distribution of flood costs while transferring the risk to actual residents of high-risk areas. Additionally, Congress and FEMA should explore methods to reduce future risk, such as expanding buyout efforts to alleviate the burden of repetitive loss of properties.

 Although FEMA is responsible for flood mapping, calls for premium increases will ultimately require action from Congress. For most rate increases, FEMA is limited to raising premiums by no more than 18% through congressional action. At this rate, premiums will not align with risk until 2037.

 For NFIP to pay its claims from the 2024 hurricane season, it will need to incur additional debt, or Congress will need to provide debt relief. However, to ensure NFIP’s sustainability, as President Biden’s administration has called for, Congress and FEMA must engage in more radical restructuring. It is clear that the National Flood Insurance Program should not, and likely cannot, continue in its current state. Moreover, it is increasingly crucial for the United States to develop better disaster management policies that discourage risky development, encourage better adaptation strategies, and provide a sustainable approach to funding relief efforts.