Rhode Islanders with flood insurance are bracing for rate increases in the wake of hurricanes Harvey and Irma, as questions again are being raised about the costs of such insurance in the United States.
Approximately 15,000 Rhode Islanders have policies covered by the National Flood Insurance Program, a U.S. Federal Emergency Management Agency-administered flood-insurance program for most policies in the United States.
The program, however, is woefully underfunded, with about $1.5 billion on hand and debt exceeding $25 billion, according to recent reports from FEMA. Hurricane Harvey alone was estimated to cost the program about $11 billion (Irma costs had not yet been calculated), which will undoubtedly hit the wallets of policyholders, including those in Rhode Island.
“I think an increase in cost is inevitable,” said Mark A. Male, executive vice president of the Independent Insurance Agents of Rhode Island. “If [FEMA] wants to maintain a balanced fund, it’s going to take more money coming in.”
The program’s deficit is nothing new. It was largely created in the wake of Hurricane Katrina, a deadly storm that flooded New Orleans in 2005, and Superstorm Sandy, which ravaged New York City and the surrounding suburbs in 2012.
Interest alone on the program’s current debt has required about $400 million from premiums each year, according to estimates earlier this year.
Cost increases were so sharp following past storms that Congress decided to cap how much premiums could grow each year. The decision came as a welcomed sign to policyholders, who have suffered from soaring costs, but further exacerbated the program’s lopsided balance sheet.
“Those increases were so significant the insurance was becoming unaffordable,” Male said.
Congress is considering whether to renew the federal program, set to expire on Dec. 8, which has raised questions about its effectiveness.
Sen. Jack Reed, a Rhode Island Democrat, is a staunch supporter.
“Congress must find a way to stabilize the program and prevent soaring costs from straining household budgets in Rhode Island, both on the coast and by our many inland rivers and streams,” he said in March.
Prior to Harvey and Irma, Reed was calling for the reauthorization of the program, saying it was critical to stabilizing the real estate market in Rhode Island.
‘Insurance companies … have no desire or appetite to underwrite flood insurance.’
MARK A. MALE, Independent Insurance Agents of Rhode Island executive vice president
The lion’s share of Rhode Island property owners, however, do not have flood insurance. But it’s a necessity for many with property loans in flood-prone areas. There’s approximately 13,000 properties in areas at high risk of flooding, according to the R.I. Emergency Management Agency, and it’s not like those property owners can do a lot of shopping around for different flood-insurance plans.
“Insurance companies who are in the marketplace have no desire or appetite to underwrite flood insurance because of the typical scope of damage,” Male said. “There’s not a lot of predictability to storms … and floods are virtually unpredictable.”
Indeed, with the exception of some nonadmitted carriers, also known as surplus or excess-lines insurers, private insurers do not provide flood insurance. And nonadmitted carriers – with low levels of capital reserves – can be a risky bet, as the companies are not regulated and do not contribute to the State Guaranty Fund, a pool of money used in the event an admitted insurer goes bankrupt.
“If a nonadmitted company does go out of business, there is no fund there to respond to claims,” Male explained.
Rhode Island hasn’t seen significant statewide flooding since 2010, when it was drenched during a nor’easter that flooded inland rivers. At the time, the disaster was called a 265-year flood, meaning the probability of a similar storm coming along was once in 265 years.
The rarity of such flooding, along with the high cost of flood insurance, has dissuaded many from buying flood insurance. The dynamic hurts the federal program, as a larger risk pool could potentially help close the deficit and slow the pace of premium cost increases.
But the language used to describe flooding is misleading, Male said, which further discourages property owners from buying flood insurance.
“The industry and government will use these terms, 100-year flood, or 500-year flood, and when property owners hear that they say, ‘Gosh, I’m 50 years old, I don’t need to buy that insurance,’ ” Male said. “But we’re our own worst enemies when we say that.”
A “265-year flood” doesn’t mean a comparable storm – or one much worse – won’t happen tomorrow. And Rhode Island scientists say climate change is causing these types of storms to happen more frequently.
Such a recipe spells trouble for a state with more than 400 miles of coastline.
“Our coast … and many other areas of this nation [are] under threat,” said Grover Fugate, executive director of the R.I. Coastal Resource Management Council.
Eli Sherman is a PBN staff writer. Email him at Sherman@PBN.com, or follow him on Twitter @Eli_Sherman.
