Rethinking the federal flood insurance safety net for a more resilient future
The phrase “100-year flood” can be difficult to unpack. For those who are unfamiliar with the term, it applies to an area that has, on average, at least a 1 in 100 chance (or 1% probability) of a flood event occurring in any given year.
Nevertheless, the meaning of this term and its relationship to U.S. Special Flood Hazard Areas have resulted in a public misunderstanding of the federal regulatory flood insurance safety net — the mandatory purchase of flood insurance — which requires owners of properties in a Special Flood Hazard Area with a mortgage to maintain flood insurance for the life of a loan.
It is not uncommon for a homeowner to acknowledge that their home is in a “100-year floodplain” and still purchase the property. This language could easily lead some prospective buyers to surmise that if the area in which they purchased a property flooded 30 years ago, that it will not flood for another 70 years. However, these owners are sometimes caught unprepared by not understanding the actual risk of living in the floodplain.
The example above is not an atypical scenario. It is therefore imperative to employ policies, services, data and technology that more effectively engage with homeowners and business owners to dispel the myths surrounding the safety net of mandatory flood insurance purchase. In doing so, everyone can come to a clearer understanding of flood risks.
Myth 1: Buildings in the Special Flood Hazard Area will flood only once every 100 years.
Fact: Statistics show that a home in the Special Flood Hazard Area has at least a 26% chance of flooding over the course of a 30-year mortgage. This is a much greater statistical chance than the terminology leads one to believe when reading the definition of a Special Flood Hazard Area, which describes the designated area as “the area that will be inundated by the flood event having a 1% chance of being equaled or exceeded in any given year.”
In fact, according to data from the National Oceanic and Atmospheric Administration (NOAA), over a recent 10-year period, the U.S. experienced more than 40 rainfall events described as once-in-500-year events. Several states even witnessed once-in-1,000-year events in subsequent years.
Myth 2: My mortgage lender does not require flood insurance, so I don’t need it; my home isn’t at risk.
Fact: Mortgage lenders do not advise on whether you “need” flood insurance.
Mortgage lenders comply with a minimum federal requirement that is based on the current definition of the Special Flood Hazard Area. This definition — an area with at least a 1% or greater annual chance of flooding — has been in place for more than 50 years, during which period there have been several efforts to alter or expand it.
In fact, the Federal Emergency Management Agency (FEMA), the U.S. Department of Housing and Urban Development and other government entities are currently considering regulatory changes. These changes could expand the definition of a Special Flood Hazard Area to cover a much larger geographic area that reflects the significant flood risk that exists beyond the currently defined limits.
Myth 3: If my mortgage lender does require me to purchase flood insurance, then I am fully protected even if there is a rare flood.
Fact: The federal mandatory flood insurance purchase requirement is a minimum standard intended to ensure that at least a baseline amount of protection is in place. However, this minimum may not be sufficient for homeowners to rebuild or recover after a disaster.
Under the National Flood Insurance Program (NFIP) there is only $250,000 of building coverage available for residential homes, which is well below today’s national average home value. Furthermore, the cost of flooding often extends beyond repairing damage to the home.
The Mortgage Industry Standards Maintenance Organization (MISMO) recently released a Flood Risk Disclosure Guide intended to inform homeowners about the seriousness of flood risk. Not only does the initial risk present a substantial cost that is worth proactively mitigating, but under the NFIP’s rating methodology, the cost of flood insurance may increase considerably with each claim payment, resulting in potential affordability concerns.
Importantly, the federally mandated purchase of flood insurance is intended to reduce the impact of uninsured flood losses on taxpayers by relieving the reliance upon FEMA federal disaster assistance following a flood. Like any safety net, this mechanism is designed to catch a certain population, covering mortgaged buildings in the highest-risk areas with a minimum amount of flood insurance. But this backstop does not catch all property owners.
Today’s federal safety net is only a minimum. But by understanding that this is just a baseline, it becomes possible to focus on improving the safety net by expanding its reach and improving the way that we assist those outside of the net through information and education.