There’s an old saying: “A recession is when you lose your job, a recession is when I lose my job.”
Similar logic applies to floods. Hurricane Helen brought flooding disasters to southern Appalachia not seen since Katrina. But even just one inch of water inside your home can be life-changing.
It doesn’t have to be that way. Due to global warming, heavy rain disasters are becoming more common and destructive. That means Americans around the world must be better prepared for the potential for catastrophic flooding, and not just from storms like Helen and Super Hurricane Milton that hit Florida’s Gulf Coast. Fixing the nation’s broken flood insurance system is a good place to start. The Federal Emergency Management Agency, which administers the national flood insurance program, is running out of money due to repeated disasters and four times as many properties receiving repeated disaster payments over the past 20 years.
Helen’s debacle highlights insurance issues. The storm could cause up to $250 billion in damage and economic losses, according to the latest estimates from commercial forecasting firm AccuWeather. If that happens, it would be the second most destructive storm on record, after Katrina. It was also the deadliest storm since Katrina, with at least 230 lives claimed so far.
However, Standard & Poor’s estimates that insured losses from the storm will be only $5 billion to $15 billion. This pales in comparison to the $97 billion in profits the insurance industry made in the first half of this year. What a relief for the insurance industry!
Why are insurance companies so lucky and homeowners so unlucky? The culprit is primarily flood insurance, or lack thereof.
Less than 2.5% of homes in Helen’s path were insured against flooding, Bloomberg News reported. NBC News estimates that in Buncombe County, North Carolina, where hard-hit Asheville is located, only 0.7% of homes had flood insurance.
In fact, only about 4% of all homeowners in the U.S. have flood insurance, primarily through insurance programs, according to FEMA. According to 2018 estimates from the Wharton School, less than one-third of homes have flood insurance, even in high-flood-prone areas.
Homeowners are taking on a lot of risk by not purchasing flood insurance. According to FEMA, 99% of U.S. counties have flooded at least once since 1996, and 40% of flood complaints come from outside high-risk areas. And authorities suggest that just one inch of water inside a home can cause $25,000 worth of damage.
But forget that number salad. All you need to know is that warmer weather means that regular rainstorms release more water because physics dictates that hot air holds more moisture. If you live in an area that gets rain, you probably need flood insurance. And in Death Valley, it sometimes rains and sometimes floods.
Many homeowners probably still don’t realize this, in part because FEMA’s own flood maps are outdated and don’t reflect climate change. Others may feel that the risk is too low to justify the cost of flood insurance. The median annual cost is less than $800, which feels like a bargain compared to, say, $25,000. Clearly too many people don’t see it that way.
“Floods are low probability but high consequence,” Wharton professor Robert Meyer, an expert on insurance and consumer behavior, told me. “Our brains aren’t wired well to make wise decisions about that.”
Meyer suggested that humans have evolved to be optimistic and amnesiac, perhaps to cope with the dark harshness of reality. We think that bad things only happen to other people, and we forget the pain when bad things happen.
People also tend to follow the crowd. If their neighbors don’t have flood insurance, they think it’s okay for them not to either.
Meanwhile, there are few structural incentives for people to buy flood insurance. It is required for homeowners with federally backed mortgages in FEMA high-risk areas, but only a small number of them do. And no one else needs to buy it. Some private carriers are starting to offer this, but consumers should still explore it. And the $800 you might spend on premium will buy you a lot of gas and eggs.
Making flood insurance cheaper would make it more attractive. And the magic of insurance is that the cost goes down as more people take out insurance. One way to achieve this could be through publicly funded national or regional risk pools. Representative Jared Moskowitz, D-Florida, has proposed creating a National Catastrophe Insurance Fund to cover the difference between storm damage and what insurance companies can pay. Structurally, it feels a little too similar to a public bailout of insurance companies and may not work politically.
But the goal of sharing risk is not a bad one. A recent research paper published by think tank Climate & Community Institute and several universities suggests creating housing resilience agencies at national or regional levels to pool and reduce risks.
Reviewing insurance regulation could be another approach. Kenneth Klein, a professor at California Western Law School, suggested that insurance companies should be forced to include all perils in homeowners’ policies. This lowers the cost of insuring not only floods but also often excluded risks such as earthquakes and mold, while leveling the playing field for all insurers. Insurance companies could either cover all homeowners in a particular state or lose the right to cover any homeowners.
Other long-term fixes to FEMA’s flood plan are needed, my Bloomberg Opinion colleague Jonathan Levine said, including cutting back on subsidies for wealthy people rebuilding in at-risk areas. None of this is easy. But as with many things related to climate change, making difficult but necessary choices now can help us avoid more expensive and painful choices in the future.
