Flood Insurance

Last Updated: 1/31/2024

Issue: Floods are the most common and most destructive natural disaster in the United States. Ninety percent of all natural disasters involve flooding, and all 50 states have experienced floods or flash floods in the past five years, according to Floodsmart.gov. The damage from a flood is not covered under a standard homeowner's policy. Flood insurance is a special policy that is federally backed by the National Flood Insurance Program (NFIP) and available for homeowners, renters, and businesses. It is estimated that between 85% and 95% of homeowners do not have flood insurance.

Background: The NFIP was created as a result of the passage of the National Flood Insurance Act of 1968. Congress enacted the NFIP primarily in response to the lack of availability of private insurance and continued increases in federal disaster assistance due to floods. At the time, flood was viewed as an uninsurable risk and coverage was virtually unavailable from private insurance markets following frequent widespread flooding along the Mississippi River in the early 1960s. The NFIP is a federal program, managed by the Federal Emergency Management Administration (FEMA), and has three components: to provide flood insurance, to improve floodplain management, and to develop maps of flood hazard zones.

The NFIP allows property owners in participating communities to buy insurance to protect against flood losses. Participating communities are required to establish management regulations in order to reduce future flood damages. This insurance is intended to furnish as an insurance alternative to disaster assistance and reduces the rising costs of repairing damage to buildings and their contents caused by flood. A homeowner is able to purchase excess flood insurance, but they must be covered by NFIP flood insurance first. Information detailing how to obtain flood insurance can be found at www.floodsmart.gov .

Since NFIP's inception, additional legislation has been enacted to strengthen the program, ensure its fiscal soundness and inform its mapping and insurance rate-setting. More recently:

• On July 6, 2012, the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) was signed into law. BW-12 reauthorized the NFIP through Sept. 30, 2017, and made a number of reforms aimed at making the program more financially and structurally sound. The purpose of the legislation was to change the way the NFIP operates and to raise rates to reflect true flood risk, as well as make the program more financially stable. As implementation moved forward, constituent concerns over flood insurance premium increases prompted legislative efforts to modify some of the BW-12 reforms.
• On March 21, 2014, the Homeowner Flood Insurance Affordability Act of 2014 was signed into law, which repeals and modifies certain BW-12 provisions and makes additional program changes to other aspects of the NFIP. According to FEMA, the law lowers the rate increases on some policies, prevents some future rate increases, and implements a surcharge on all policyholders. It also repeals certain rate increases that have already gone into effect and provides for refunds to those policyholders.

Click here for an overview of the Homeowner Flood Insurance Affordability Act of 2014.

Private Flood Insurance

The Flood Insurance Market Parity and Modernization Act was introduced as HR.2901 in 2015 and S.563 in 2017 to help facilitate the development of the private flood market.

While the market for private flood insurance remains relatively small, in recent years, more sophisticated risk mapping and modeling have developed, enabling the private market to more accurately price the risk and generating new interest among private insurers to provide such coverage. Although The Biggert-Waters Flood Insurance Reform Act of 2012 (also known as BW-12) affirmed Congress’s intent that lenders can accept private flood insurance as an alternative to the NFIP, the definition and prescriptive conditions have created a significant obstacle impeding the development of a private market. 

There may be advantages to selecting a policy with one of these companies, as they tend to offer higher coverage limits and optional coverage.  Some companies may not require customers to provide an elevation certificate which could save time and money.  Currently, the private flood insurance market is working toward providing customized coverage and simplifying claims processing by embracing technological solutions. Digital communications and the use of digital apps offer a faster method of communication that may be more appealing than working with government entities. Additionally, with the launch of the NFIP's Risk Rating 2.0 launching in the Fall of 2021,some experts predict 77% of NFIP customers will see increased rates. This price increase could incentivize customers to seek flood insurance elsewhere.

Risk Rating 2.0 is a new methodology the NFIP is undertaking to price flood risk.  Currently, flood risk is assesed on the property's elevation level and whether or not it is located in the 100-year floodplain.  The new methodology will consider other factors (flood frequency, distance from a water source, cost of rebuilding, and different types of flooding like storm surge and river overflow), giving homeowners a much more individualized assessment.  

Congress and President Biden reauthorized the NFIP through September 30, 2024. The program has had numerous short-term extensions and proposed reform measures. The NAIC and state insurance regulators support a long-term reauthorization of the NFIP to avoid short-term extensions and program lapses that create uncertainty in both the insurance and housing markets.

The NAIC's NFIP reauthorization recommendations for Congress also includes encouraging growth in the private flood insurance market. Congress faces the challenge of trying to maintain a balance between improving the financial solvency of the program and reducing taxpayer exposure while also being mindful of affordability concerns.

The NAIC Property and Casualty (C) Committee was charged with creating a best practices document to help facilitate the private flood insurance market. This document was drafted by the NAIC Catastrophe Insurance (C) Working Group and has been adopted by the Working Group, as well as the Property and Casualty (C) Committee.  Currently, the committee is monitoring congressional legislation related to the reauthorization of the NFIP, as it is due to expire at the end of September.

In 2017, the NAIC Center for Insurance Policy and Research (CIPR) released the study Flood Risk and Insurance, which examines the rising flood risk in the country and the need to overhaul the NFIP while encouraging greater growth in the private flood insurance market. The NAIC has also placed increased focus on educating the public about potential damages and insurance claims related to floods. More details can be found under the Understanding Flood Insurance page through the NAIC's website.