Floods are one of the most common natural disasters that occur worldwide, and their frequency and severity are increasing in the United States due to climate change. Floods are known to cause significant damage to properties and infrastructure, resulting in huge financial losses for individuals, businesses, and governments. Flood insurance is a necessary tool that can help mitigate these losses and provide assistance to those affected by floods. While flood insurance is currently optional in most regions, there is a growing expectation that it may become mandatory due to the increasing frequency and severity of floods. So, with climate change presenting more opportunities for extreme flooding, could flood insurance become mandatory in the future, and what would that mean for homeowners and businesses?
The Current State of Flood Insurance
The average American may not think about flood insurance. As of today, flood coverage is only mandatory in territories considered “high-risk locations”. The Federal Emergency Management Agency (FEMA) estimates that about 13 million Americans reside in these flood zones, which are defined as having at least a 1% chance of flooding. While 13 million may sound like a lot, it only ends up being about 13% of the population. That leaves approximately 87% of US infrastructure uninsured.
FEMA has received growing criticism for using outdated flood maps and failing to account for all high-risk zones. The latest flood event in Florida, Hurricane Ian, is a perfect example of coverage negligence. Hurricane Ian alone resulted in $10B in uninsured losses, which is almost equal to the number of covered losses. So, how did such high uninsured damages occur? A lack of proper coverage. Most homeowners' policies have standard coverage that includes wind, but flooding is almost always excluded. In fact, any water damage resulting from something outside of your house will be excluded. So, in the case of these hurricanes, any home without a separate flood policy would not receive coverage for any damage resulting from water and flooding.
Flood Risks Remain Underestimated
The Gulf Coast region, which stretches from Texas to Florida, is the region most prone to hurricanes, storm surges, and heavy rainfall. However, the flood zone map only classifies the outermost coastline as “high risk”. Over the past few years, we have seen floods reach far beyond the flood zone line, which begs the question, why haven't the zones been reevaluated?
Recent studies have shown that the real number of people who are at risk for flooding is actually closer to 41 million. That’s three times the estimate reported by FEMA. Experts from the U.S Environmental Protection Agency argue the zoning issues stem from FEMA ignoring smaller streams, which should be considered high risk if they run through highly populated areas. They also claim that current zoning does not take climate change into consideration, which is a proven factor in the severe weather spike.
As climate change continues to progress, new regions will experience an increase in flood risk and need to address how to protect their infrastructure. Most zoning is focused in the southern regions of the U.S., but as temperatures rise, flash flooding in the North will be a huge concern, along with inland flooding and stronger storms.
More Damage, Less Funding
As flooding increases in frequency and severity, it's becoming challenging for FEMA to provide disaster relief recovery to all those affected. Many Americans rely on FEMA’s Individuals and Household Program (IHP), which provides financial aid for those affected by flooding, even if they don’t have insurance. However, it’s not a substitute for coverage, and there is no guarantee of assistance. As of 2023, aid is capped at $43,000 for housing assistance and $43,000 for non-housing assistance. These numbers are adjusted annually, and only cover a fraction of what a flood policy would cover. FEMA relies on federal funding, and as the U.S. faces more severe losses, funds will continue to diminish. These losses affect everything from individual families to businesses, and the overall economy, but there aren’t enough regulations in place to discourage individuals and businesses from moving into high-risk zones.
Increasing Flood Insurance Adoption
To avoid economic downfall, flood risk mitigation needs to become a priority. According to FEMA, their goal is to double the number of flood policies purchased through the National Flood Insurance Program (NFIP). Some of the factors keeping numbers so low are poor communication and education. So, with more public discussion around the increasing risk, and educational materials on options for coverage, the goal is to expand public coverage adoptions.
Flood Insurance Considerations for the Future
While nothing is set in stone, there is plenty of discussion about changing the flood coverage regulations. Many argue that it would be more beneficial for a homeowners insurance policy to have a flood coverage option. Experts argue that an “opt-out” structure would increase the number of homes covered for flooding. Essentially, they argue if flood coverage was included in a policy with an option to “opt out”, the majority would keep the coverage. Most carriers are skeptical to take the loss risk, but if introduced in a way that kept the potential for profit, it could be a strong contender for future carriers.
Additionally, FEMA is exploring increasing the regulations of flood insurance to require every home to have a minimum threshold for coverage. The extent of coverage would still be reliant on the flood zone maps, but with a minimum amount for every region. Universal coverage would increase premiums, ensuring that less funding is needed to maintain protection programs.
For businesses and families, this would generally be a positive introduction. Most likely, the premiums would be minimal for those who are not in a high-risk zone. For those who are, premiums would be calculated on the same basis as they are today. The idea is that minimum but widespread premiums across the US would raise overall funding for disaster relief, without burdening families financially. Additionally, in the event of unexpected weather events in “low-risk” areas, previously unprotected families and businesses would have some financial assistance.
Regardless of what path FEMA and environmental agencies decide to take, it is clear that our current flood protection plans are not adequate. Too many businesses and families face costly floods, without proper education on how to mitigate their risk. It’s clear that changes are near, and the future of our insurance structure will look very different.
Review Your Coverage with ECBM
Every business and individual faces their own set of risks, and it’s not always clear how best to protect yourself. ECBM has expert agents and consultants who can identify your risks, and build a clear plan to protect your business and assets. Whether you need insight on the best flood coverage or want a general overview of your business insurance plan, ECBM can help. Contact one of our agents for more information.