Addressing the Emerging Flood Insurance Crisis Through Transparency, Education, and Advocacy

April 09, 2024

Earlier this year, officials, subject matter experts, and researchers gathered at a conference in Tampa held by the Gulf of Mexico Alliance network — which includes state and federal agencies, tribal governments, communities, academic organizations, businesses, and non-governmental organizations — to discuss the Gulf region’s most pressing problems. Among the sessions focusing on ecosystem health, art-science collaborations, and oil spill science, one issue towered above the rest because of its far-reaching consequences on Gulf Coast residents: flood insurance. Premiums for the most vulnerable have increased significantly. What is clear after this conference is that we need a multi-faceted approach to address the current flood insurance system’s inequities and lack of clarity.

Recently, the Center for Economic and Policy Research released a report detailing flood and hazard insurance programs’ particular issues adjusting to climate change. Claims from hurricanes and storms are causing the FEMA-run National Flood Insurance Program (NFIP) to accumulate billions in debt to the US Treasury with interest payments that exceed investments in resilience. To adjust premiums to reflect actuarial risk, the NFIP rolled out Risk Rating 2.0 in 2021. When adjusting premiums, instead of relying solely on often outdated flood maps, Risk Rating 2.0 considers several elements, including the property’s distance to a water source, its elevation, and the cost of rebuilding. However, in doing so, premiums for the most vulnerable have increased significantly, and the variables for determining them remain in a black box that is only clear to rate adjusters.

The risk rating issue is why groups like the Gulf of Mexico Alliance are trying to determine how policymakers can make flood insurance more equitable and transparent. Part of the answer lies in education and communication. More often than not, those affected by disasters are the most knowledgeable about the ins and outs of filing insurance claims and understanding policies. These homeowners have real experience interacting with insurance companies, comprehending jargon, and navigating the claims process. Lacking government support whether through bureaucratic red tape or political inaction, this expertise prepares these individuals to be successful advocates for policyholder rights because of their ability to negotiate with adjusters, fight unfair denials, and obtain adequate compensation for losses. So, how do we extend this knowledge to the average consumer?

One problem is the communication of risk at the state and federal levels. At the federal level, no existing law requires home sellers to reveal whether a property has had previous flood damage or is prone to flooding, and 18 states — including hurricane and flood-prone states such as Florida, Georgia, and West Virginia — currently lack mandated flood risk disclosure. Even if you know you live in a FEMA-designated flood zone, the language outlining the probability of risk can be misleading. For example, the term “100-year flood” is used frequently by government agencies, insurers, and researchers to denote an event with a 1 in 100, or 1 percent, probability of occurring in a year. But to those who don’t read all the fun literature on floods and insurance, it sounds like that event only occurs every 100 years. It also doesn’t help that, per the famous work of psychologists Daniel Kahneman and Amos Tversky, we are terrible at making decisions based on probability. A person with a 30-year mortgage might hear the term “100-year flood” and shrug.

However, even informed consumers who have reduced their risk hit a brick wall when negotiating for lower premiums based on a methodology largely invisible to homeowners. Under the NFIP’s old methods, consumers could challenge insurers’ decisions through the flood mapping process. That is no longer the case. With Risk Rating 2.0, the method of challenging a decision is less transparent since rates are set through a confusing algorithm. Groups such as the Gulf Center for Equitable Climate Resilience are trying to answer these questions by challenging decisions one community at a time. Homeowners shouldn’t have to jump through hoops or rely on civil society organizations to answer these questions.

We need a multi-faceted approach to address the current flood insurance system’s inequities and lack of clarity. This approach would involve education, policy changes, transparency, and community advocacy. First, the federal government and states must improve risk communication to create informed consumers. With state and local support, institutions that serve communities, such as resilience hubs and community centers, can also provide informational sessions around insurance issues. Second, buyers should know what they are getting into when they purchase a home. Laws at both federal and state levels should mandate disclosure of flood risk information to potential homebuyers. And finally, homeowners should not have to rely on the work of non-governmental organizations to challenge policies or confusing language. Instead, consumers should have easier access to information and avenues to address their concerns. These steps won’t solve our current insurance crisis, but they will go a long way in helping homeowners make the right decisions.

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