On Flood Insurance, Puzzling Data

A new Urban Institute paper says too many homeowners lack flood insurance; but those who do have flood insurance often buy it voluntarily-not because it was required by their mortgage lender.

The paper, Too Many Homeowners Lack Flood Insurance, Many Buy It Voluntarily (https://www.urban.org/urban-wire/too-many-homeowners-lack-flood-insurance-many-buy-it-voluntarily), notes despite four major, destructive hurricanes over the past two summers: Harvey (Texas), Irma (Florida), Maria (Puerto Rico) and Florence (the Carolinas), the current flood insurance system leaves too many homeowners vulnerable when disaster strikes.

Urban Institute authors Sarah Strochak, Jun Zhu and Laurie Goodman said as the recovery from Hurricane Florence begins, policymakers should think about the effectiveness of our current flood insurance system, noting the number of flood insurance policies in force through the National Flood Insurance Program has declined over the past 10 years and stood at just over five million in 2018.

Data from the 2017 American Housing Survey show that just over one in 10 homeowners have flood insurance nationally. But in cities that are more prone to flooding, such as Houston and Miami, the number is closer to one in three.

Furthermore, the Survey said of all homeowners who had a flood insurance policy in 2017, 60 percent chose to buy a private policy on their own accord and only 40 percent bought flood insurance because it was required by their mortgage lender.

“We don’t know the reasons for this, but two possibilities are that mortgage borrowers are highly conscious of the extreme damage that floods can cause or that flood maps (on which required insurance are based) are outdated,” the authors said. “In addition, because homeowners with no mortgage who buy flood insurance are not subject to insurance purchase requirements, this group may also contribute to the voluntary population.”

The National Flood Insurance Program requires homeowners to buy flood insurance if their home is in a high-risk flood area and they have a mortgage from a federally regulated or federally insured lender. However, flood maps have not been updated in years. The program was thrown into further confusion a few years ago when the Biggert-Waters Flood Insurance Affordability Act of 2012, ostensibly created to rein in high flood insurance premiums, had the opposite effect, sending premiums skyrocketing. Meanwhile, Congress has not approved a long-term extension of the NFIP, despite efforts by the Mortgage Bankers Association and other industry trade groups; the program is set to expire (again) on Sept. 30.

The paper said nationally, 40 percent of those who have flood insurance purchased it because it was required and 60 percent purchased it voluntarily. In Houston, 78 percent had purchased flood insurance voluntarily. Harvey’s recent damage may have spurred some homeowners to buy insurance, and the multiple floods in the years before Harvey likely led to an increase in the number of insured homeowners.

In Miami, just 42 percent of homeowners with flood insurance had purchased it voluntarily when surveyed. Even though hurricanes are common in this area, Hurricane Andrew in 1992 was the most recent significant storm to hit the region, so it’s possible that homeowners were lulled into a sense of security.

In New York City, where hurricanes are less frequent but memories of Hurricane Sandy loom large, 60 percent of homeowners–right at the national average–had purchased voluntary flood insurance.

The paper reported the share of voluntary flood insurance purchases is also higher for newly built homes compared with houses built 40 years ago. Flood insurance coverage increased from 11 percent for homes built in the 1980s to 14 percent for homes built between 2010 and 2017. For homes built in the 1980s, just 59 percent of homeowners with flood insurance voluntarily purchased it, compared with 64 percent for homes built since 2010.

“This trend suggests that owners of newly built homes, which are generally more expensive than existing homes, are more cognizant of the possibility of flooding and are looking to protect their investment,” the authors said.