Federal flood insurance remains underpriced, fueling coastal risk and rising taxpayer costs: BofA

[Hurricane Sandy: man standing on a flooded street]
AndreyGatash/iStock Unreleased via Getty Images

Premiums in the National Flood Insurance Program (NFIP) remain well below actuarially sound levels and won’t be fully repriced until 2037, according to Bank of America. The mispricing creates a long window for private carriers to skim profitable, lower-risk policies and leave the government program with a costlier residual pool.

The federal scheme has racked up roughly $25 billion in cumulative losses since inception and is projecting an additional $2 billion to $3 billion in underwriting shortfalls annually over the next five years.

Chronic underpricing, especially in coastal areas, has effectively supported property values by masking true risk costs, Josh Shanker, analyst at BofA, said in an Oct. 27 report.

While NFIP gross premiums grew 12% from 2020 to 2024, the average state actually saw premium declines, reflecting cross-subsidies that keep prices low in peak-risk coastal zones while charging comparatively more in safer regions. The imbalance shows up starkly in performance: North Dakota’s 1997 to 2024 loss ratio stands at about 240%, despite being far from the ocean.

Losses are also highly concentrated. Just 36 counties, most of them ocean-facing, account for half of all NFIP claims by count, underscoring how a narrow slice of properties drives program volatility. Historically, outsized deficits have clustered around four events: Katrina (2005), Sandy (2012), Harvey (2017) and Helene (2024).

FEMA'S SLOW PHASE-IN

FEMA’s multiyear overhaul, known as Risk Rating 2.0, is pushing prices toward risk-based levels, but its slow phase-in means many legacy policies will not reach actuarially sound premiums for more than a decade. That lag “invites adverse selection,” industry observers warn, as private underwriters target the best risks and NFIP increasingly absorbs the rest.

The arithmetic leaves taxpayers subsidizing higher-risk coastal homeowners, even as under-insured inland regions face mounting surprises, from Texas summer-camp floods to New York City subway inundations, amid more volatile rainfall and drainage shocks. In 2024’s Hurricane Helene, for example, inland North Carolina saw extensive damage with relatively few insured claims, according to BofA.

MOST PROPERTIES NOT COVERED FOR FLOOD

Despite the exposure, take-up remains low: about 4.7 million NFIP policies are in force against roughly 100 million U.S. buildings, leaving most properties uncovered for flood. Distribution frictions and perceived mispricing in lower-risk areas have limited participation.

Policy experts argue that faster movement to risk-based premiums in peak zones, paired with simpler, appropriately priced options for lower-risk properties, could broaden the pool and stabilize finances. Absent that, the program is likely to see continued erosion of its “good risks” to private markets while its losses deepen.

For households outside traditional floodplains, owning flood coverage can still be prudent, particularly if priced appropriately, given the growing incidence of non-coastal flood events and the limited protection offered by standard homeowners policies.

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