In this age of extreme weather and worsening natural disasters, it is crucial that we refresh and modernize our approach to disaster mitigation and recovery. An excellent place to start would be flooding, which costs our nation approximately $17 billion in damages each year.
Americans who live in a ‘mandatory’ flood zone as defined by FEMA are required by law to obtain flood insurance before purchasing their home. Residents in such zones must buy flood insurance as a condition of home purchase, and they have historically purchased insurance from the federal government through the National Flood Insurance Program (NFIP). Pending regulatory changes would allow private insurers to compete with government insurance, but for the moment, the NFIP enjoys a monopoly in mandatory zones.
However, it’s important to understand that damaging floods occur outside these ‘mandatory’ zones every year. Approximately 20% of NFIP claims, for example, come from flood events in FEMA’s ‘moderate’ risk zones, where residents are not required by law to purchase flood insurance. Despite this fact, many homeowners mistakenly conclude that because they’re not in a mandatory zone, there is no need to purchase flood insurance. According to the NFIP’s flood calculator, just one inch of standing water due to flooding can cause $25,000 of damage to a home.
Why does this matter? Because private insurance is as important a link in the chain of community resilience as government support from FEMA or other sources. In an era of worsening climate events, the costs of repairing and rebuilding from floods or other disasters have increased significantly. According to the First Street Foundation, our annual losses from floods – currently at $17 billion – could grow to $32 billion by 2051. Of course, this figure does not include the cumulative cost of tornadoes, hurricanes, and other wind events, fires, and earthquakes. Over the past five years, the average annual cost for natural disasters in the United States was $51 billion. If that aggregate number continues to increase, it will eventually threaten the ability of government entities at all levels to finance needed repairs and recovery efforts.
In short, we need to stop depending solely on the government to restore our communities after disaster strikes. Palomar envisions a chain of community resilience where government, NGOs, community leaders, and insurers work seamlessly to maximize available resources to support Americans in need. A property that lacks adequate protection against flood or other events creates costs that are shifted to other links in the chain of resilience – government aid, NGOs, and philanthropies. This is not sustainable in an era of tightening budgets and worsening weather.
Palomar has partnered with NGOs like Team Rubicon, which deploys armies of volunteers in the immediate aftermath of a disaster and helps Americans return to their homes as quickly and safely as possible. Our Palomar Protects™ program invests a percentage of our earned premium into Team Rubicon’s ongoing recovery efforts so that policyholders can help strengthen their communities while also protecting their properties and possessions.
The urgent order of business, though, is to ensure that Americans are aware of their risk from flood damage and have multiple affordable options to protect their families. This is of particular importance due to long-overdue changes to the pricing of NFIP policies, scheduled to take effect in April of 2022. The NFIP has consistently lost money because its rates do not reflect the actual risk of flood losses. As a result, the Treasury has been forced to lend NFIP money to keep the program running. At present, the program owes more than $20 billion to the Treasury, and all taxpayers, regardless of where they live, are ultimately on the hook for these costs. Many critics also note that artificially low NFIP rates incentivize development in floodplains and other areas at a high risk of flood.
Recognizing this, FEMA has proposed a re-pricing of NFIP policies called ‘Risk Rating 2.0,’ which is scheduled to go into effect beginning this month – the start of the traditional flood season. Residents of high-risk zones will likely see an increase in the rates they pay for coverage, and they must educate themselves about their options and potential alternatives to the NFIP. It is equally important that residents of moderate-risk zones consider their risk of flood damage and investigate options for protection. Every dollar spent by private insurers paying claims or by NGOs like Team Rubicon providing immediate relief to distressed communities relieves the pressure on government and taxpayers to fill the breach. The time to update our approach to disaster response is here, and we must seize the moment.
Bill Bold is the Chief Strategy Officer at Palomar. He is responsible for strategy, external communications, policy, legal, and regulatory affairs. He brings over 30 years of experience in public policy and its relationships with government entities at the international, federal, state, and local levels.