The Pricing of Flood Insurance

Despite the availability of flood insurance in the US through the National Flood Insurance Program (NFIP), many homeowners at risk of floods are not insured. The program went deeply into debt after Hurricane Katrina in 2005 and Congress adopted multiple reforms to NFIP rate setting in 2012 and 2014. In response to the ongoing concern about the cost of NFIP policies, as well as multiple misunderstandings about NFIP rates, we simulate NFIP premiums for a sample of homes by constructing a premium calculator based on FEMA rating tables. These simulations highlight several aspects of NFIP rating in need of more attention. First, there are many implicit and explicit cross-subsidies in NFIP pricing, potentially distorting risk information and incentives. Second, NFIP rating is complicated, which can make it difficult for homeowners and untrained agents to evaluate options. Finally, the premiums we present offer insight into the ongoing debate about affordability of flood insurance by highlighting where policies cost the most. FEMA is actively exploring rate reform, which may address some of these concerns.