FEMA’s revamping flood insurance. Homeowners are poised to revolt.

On Friday the Federal Emergency Management Administration, or FEMA, will roll out sweeping changes to a government program that provides flood insurance to some three million American households. These changes will sharply raise the cost of flood insurance for many high-value homes in coastal states like Florida, sending dramatic new signals to current and potential waterfront homeowners about the risks they face from extreme weather fueled by climate change.

The rollout of this new system, known as Risk Rating 2.0, has triggered one of the most contentious climate adaptation debates in recent memory. There is no doubt on either side that the changes reflect a more accurate assessment of flood risk, but a number of politicians from both parties have petitioned FEMA to delay the rollout, hoping to protect their constituents from a decrease in property values that may accompany higher insurance premiums. The result has been yet another skirmish in a debate that will become central to climate policy in the United States: How many of the private risks generated by climate change will be shouldered at public expense?

Risk Rating 2.0 represents the first major update to the government insurance program’s risk analysis system since the National Flood Insurance Program, or NFIP, was launched in the late 1960s. Whereas the old system provided a flat risk estimate for an entire floodplain, the new system estimates the individual risk facing each home, incorporating mountains of new data about water dynamics and the replacement cost for each home. The result is that homeowners will now pay premiums that reflect the specific flood risk for their home, rather than their general area. 

This new system has exposed deep inequities in the old NFIP framework. Under the old system, homes in a given floodplain paid the same amount no matter how far they were from the water, which meant that inland homeowners were subsidizing higher-risk homes right on the water’s edge — homes that also tend to be worth more. Furthermore, because the old system did not consider the replacement cost of a house, it forced the owners of low-value homes to subsidize those with more valuable assets. The new system rectifies these issues; as a result, many wealthy waterfront homeowners are now poised to eventually see their insurance costs rise by thousands of dollars.

“The new system confirms what we knew about the National Flood Insurance Program, which was that it’s a deeply unfair system — you had low-income homeowners subsidizing high-value homeowners,” said Joel Scata, an attorney at the Natural Resources Defense Council who studies flood policy. “The new system attempts to address that.”*

Still, this new rating system represents a partial fix to a program that has fundamental and longstanding issues. Congress created the NFIP in the 1960s to fill the gap created by the departure of private insurers, who had stopped selling flood policies a few decades earlier because they were losing money. The idea was to create a nationwide risk pool by requiring every person who lived in a floodplain and held a federally backed mortgage to carry a flood insurance policy. This structure served two purposes: On the one hand, the program would pre-fund the cost of future disaster recovery by collecting premiums before the disasters happened; on the other, it would discourage people from living in risky areas by creating what amounted to a de facto tax on living in floodplains. 

The problem was that lawmakers have historically ensured that the program provides heavily subsidized rates for floodplain homeowners, compared to what they would pay on any open insurance market. The cost of insurance wasn’t high enough to discourage people from living in floodplains, so they just kept building near the water. Furthermore, participation in the program was far lower than policymakers had assumed, in part because many low-income households couldn’t afford insurance even at subsidized rates, and program officials had little ability to enforce compliance.

This wasn’t a huge issue for the first few decades, but the chickens came home to roost in 2005, when the claim payouts from Hurricanes Katrina and Rita plunged the program into a $20 billion debt hole that it still hasn’t emerged from.

Congress tried to plug this hole in 2012 with a controversial law called Biggert-Waters. The law raised premiums on almost all NFIP policyholders, jacking up some premiums by hundreds or thousands of dollars overnight. These new prices threatened to destabilize home values in coastal states like New Jersey and Virginia, and thousands of homeowners mobilized against the law. In a rare moment of bipartisan consensus, the lawmakers who represented these coastal constituents banded together to pass another bill that rolled back many of the premium increases, suggesting that homeowners should not be responsible for costs they didn’t foresee when purchasing their property.

“[Lawmakers] really responded to this ‘we played by the rules’ argument,” said Rebecca Elliott, a professor at the London School of Economics who has written a book about flood insurance. The homeowners seeing premium increases, she said, argued that “‘you can’t punish us because the world has shifted around us.’” In other words, the homeowners claimed that it was unfair for FEMA to tank their property values in order to shore up the flood insurance program.

At first glance, the battle lines that formed after Biggert-Waters might look somewhat surprising. On one side there were the floodplain homeowners facing higher premiums under the new law, along with a strong bipartisan group of Democratic and Republican politicians. On the other side there was a strange-bedfellows coalition of small-government conservative groups who wanted to cut down on government spending and environmental groups who wanted to spur climate adaptation. In the end, the former group won out — at least for a time.

The NFIP was still billions in debt, though, so FEMA undertook its own revamp of the program. The agency couldn’t alter the NFIP’s big-picture financial framework without congressional authorization, but it did have the authority to adjust how it calculated flood risk. The changes from Risk Rating 2.0 are technical in nature, but they have serious political implications: The largest premium increases under the new system are for higher-value homes that are closer to the water. Many of these properties are in coastal states like Florida, with the highest concentration in affluent beachfront communities around Tampa Bay.

But these higher-value homeowners have refused to go quietly, and their representatives in Congress have taken up their cause. 

“We are extremely concerned about the administration’s decision to proceed forward with the implementation of this program without first determining an alternative that avoids the prospect that hundreds of thousands of families will be inclined to forfeit flood insurance on their homes,” a group of senators wrote to FEMA last week. The group included two Republican senators from Louisiana and liberal leaders like Bob Menendez of New Jersey and Chuck Schumer of New York, who previously attempted to delay the program earlier this year.

Much like the controversy over Biggert-Waters, the spat over Risk Rating 2.0 centers around a question that will only become more relevant as climate change gets worse: How much should the public subsidize risky activity in economically important spheres like real estate? The invisible insurance discount available to affluent waterfront homeowners helped buoy the value of their homes, propping up a housing market that might have taken a different trajectory if homeowners had had to pay a price that reflected their true risk.

It is still unclear what will happen in these high-risk areas now that FEMA has begun to roll back this subsidy. Will coastal homeowners in places like Tampa invest in flood mitigation projects to lower their premiums? Will they drop their NFIP coverage and seek alternatives on the boutique private market? Will the wealthiest homeowners start to pay for their properties in cash and go without insurance altogether? 

“The bigger elephant in the room,” said Elliott, “is always property values…. When markets internalize information about risk, individual people lose out. There are winners and losers, and that’s not going away.” In places like Tampa, the premium surge that accompanies Risk Rating 2.0 might dampen the booming housing market, placing some mortgage holders in financial jeopardy.

This cuts to the heart of an assumption that Elliott views as central to American life: the idea that “every property can increase in value forever.” Climate change has been ratcheting up the risk on waterfront homes for decades, and the coming years will see housing markets begin to absorb new and frightening information about the scale of that risk. When that happens, some places will become less desirable — not on a temporary basis, as in past housing market crashes, but permanently. At that point both homeowners and the government may be forced to confront a hard truth laid bare by climate change: Not everyone, everywhere, can win.

*Editor’s note: The Natural Resources Defense Council is an advertiser with Grist. Advertisers have no role in Grist’s editorial decisions.