Lloyds Calls for USA to End National Flood Insurance Program

Major insurer calls for an end to government subsidies that encourage expensive house-building schemes in areas of the US at high risk of floods and storms, by Kieran Cooke for Climate News Network.

Houston floods 22 April 2016. Photo: Sandra Arnold, USACE Galveston District
Houston floods 22 April 2016. Photo: Sandra Arnold, USACE Galveston District

LONDON, 24 May, 2016 – Lloyd’s, one of the world’s biggest insurance companies, says the US government must stop providing insurance subsidies to homeowners building on flood plains and in coastal areas exposed to mounting risks related to climate change.

According to a report in London’s Financial Times, Lloyd’s says the US government’s National Flood Insurance Program (NFIP), which subsidises insurance cover for householders in regions vulnerable to floods and storms, encourages irresponsible house building.

Lloyd’s also says the NFIP subsidy regime is financially unsustainable. Because of claims related to disasters such as Hurricane Katrina in 2005 and superstorm Sandy in 2012, the NFIP has now run up debts of more than $24 billion.

Insurance companies have been among those at the forefront of analysing the financial implications of climate change and assessing climate-related risk worldwide.

Concerted Action

In the run-up to the UN conference on climate change in Paris last December, insurance companies pressed for more concerted action on global warming, saying it posed a serious threat to the future of the industry.

Insurers say rising payouts related to climate change and weather in heavily-insured western countries such as the US result in less money being made  available to provide affordable insurance in developing countries, where it is most needed.

A report by Munich Re, one of the insurance industry’s leaders in analysing climate change, says the world’s most deadly and costly catastrophe in 2015 was the Nepal earthquake in April, resulting in at least 9,000 dead and billions of dollars worth of damage.

“As is so often the case in developing countries, only a fraction of the $4.8 billion in overall losses caused by the quake and the aftershocks was insured – $210 million,” says Munich Re.

The situation in the US is the reverse, with heavy NFIP subsidies and other local, state-controlled schemes for too many homes built in areas exposed to storms and flooding.

“Intended as a disaster relief programme, the federal flood insurance scheme is really a land development policy”

The most glaring example is along the coast of Florida, a region that is regularly hit by hurricanes and giant storms. Coastal lands are also threatened by sea level rise related to climate change. Yet despite these risks, the area has seen a steep rise in population and housebuilding.

In 1992, Hurricane Andrew hit the Florida coast, causing an estimated 65 deaths and causing $25 billion of damage to housing and businesses.

With encouragement from insurance schemes subsidised at federal and state levels, the damaged areas have all been redeveloped. And insurance experts say that if a similar storm were to hit the Florida coast now, more lives could be at risk and losses would amount to $50 billion.

Bargain Prices

Professor Omri Ben-Shahar, an expert on insurance law at the University of Chicago, argues in an article in Forbes magazine that government subsidies mean that flood policies are being sold at bargain prices.

He says the system is hard to justify, with middle-class taxpayers living inland having to subsidise mostly upper-income owners of coastal homes.

“Government-provided insurance made sure that premiums were low enough to sustain ongoing development and a massive relocation of population to regions which, we now know, are borderline inhabitable,” says Ben-Shahar.

“Intended as a disaster relief programme, the federal flood insurance scheme is really a land development policy.”

After the government had to pay out massive amounts in claims in 2012 in the aftermath of super-storm Sandy, the US Congress decided to phase out the NFIP scheme and its insurance subsidies. As a result, insurance premiums in some coastal areas rose tenfold.

An intense lobbying campaign followed, and much of the NFIP scheme is now back in place. – Climate News Network

4 thoughts on “Lloyds Calls for USA to End National Flood Insurance Program

  1. I think that law makers of the U.S. and the federal government need to take a little trip to the Netherlands and see how the Dutch deal with the flooding problem there. Maybe a light will come on in somebody’s head. There are reasonable solutions to these flooding problems. Time to invest less money in insurance and come up with solid solutions to flooding in the major problem areas in the US. First solution change the way in which we build traditional houses. Start at the foundation. Change the spending habits. America believes the number 1 threat is terrorism and ISIL …it’s not ..it’s the weather. How do we cope with tidal surges and floods? Invest in a Delta plan. A Delta plan is not cheap. So is rebuilding houses time and time again after a flood disaster.

    1. Question, not a criticism — With even the conservative estimates of sea level rise projected over the next 80 years (not a lot of time when you consider the extent of development, people and assets in the flood plain) how will the Netherlands current solutions hold up?
      How much should the U.S. invest in immediate fortification of shoreline properties before they are finally washed away? When does managed retreat from the shore become a serious discussion?

  2. Actually, the NFIP reforms from 2012 are still largely in place, they were just phased in at a slower pace. Last year saw an average 20% increase in premiums, plus individual policy fees being put in place. Another increase this year for policies being renewed as well as the start of a phase out of grandfathered rates. Coastal policies are starting to impact people – policies up to $4,000/yr for parts of Norfolk. We’re pushing the CRS program to “buy those” premiums down, but unwinding this mess will take a long time and impact a lot of folks who are living in flood plains. And with the executive order of last year, the flood plains are expanding – not for the NFIP yet, but for other economic decisions.

  3. After watching the Frontline show on this program—and also seeing repeated FEMA-funded rebuilding of washed-away homes in coastal Maine (until FEMA said “no more”)—I have to agree. Building on the coast makes no sense.

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