Perspectives on Flood Insurance Demand Outside the 100-Year Floodplain

Flood insurance is a vital part of household resilience. Insured households are able to recover faster and more completely after a flood than those without coverage. Insurance provides dependable funds to finance repair and reconstruction without needing to use savings, alter consumption, take out loans, or hope for what is often insufficient and delayed federal disaster assistance. Yet, despite the resilience benefits of insurance, many households at risk of flooding do not have a flood policy, even though the National Flood Insurance Program (NFIP) has made flood coverage available to participating communities for the last 50 years (see Box 1).Early in the history of the NFIP, Congress responded to low take-up rates for flood insurance with the mandatory purchase requirement: federally regulated lenders or issuers of federally-backed mortgages must require flood insurance on all loans secured by property in the FEMA-mapped 100-year floodplain, also referred to as the Special Flood Hazard Area (SFHA). This helped increase the number of flood insurance policies purchased, but flood risk persists outside the SFHA. Despite this, few people insure when not mandated to do so. This is observed following major flood events. For example, less than a third of the buildings flooded by Hurricanes Sandy, Harvey, and Irma had flood insurance with many located outside the SFHA.There are many reasons that those at risk of flooding may choose not to insure. Observers have argued that the SFHA designation misleads people about flood risk, suggesting they are safe if they are outside this zone. Further, outside the SFHA, there is no national requirement to disclose about flood risk, few state-level disclosures requirements, and no flood insurance mandate for federally-backed loans. Logically, residents outside the SFHA may interpret such lack of disclosures and mandates as a proxy for being at low or no risk and not needing insurance. In addition, many people may not understand insurance and the role it could play in their financial protection, may not be able to afford the cost of flood insurance, or simply may not think it is worth it.That said, there are a number of counties throughout the US where the vast majority of all policies in-force are actually outside the SFHA and places where there is a high absolute number of flood policies outside the SFHA. Figure 1 shows (a) the total number of residential NFIP flood policies outside the SFHA, and (b) the share outside the SFHA. This was calculated using 2018 NFIP data made available on OpenFEMA. While non-SFHA purchase of flood insurance is noticeably higher along the hurricane-prone coasts, there are other communities, as well, where there is higher purchase outside the SFHA. Nationwide, just over half of all NFIP policies are outside the SFHA. Note, even in areas with a large share of policies outside the SFHA, the overall take-up rate outside the SFHA (that is, the share of all buildings outside the SFHA with flood insurance) is typically still very small, often in the single digits.To better understand the possible reasons for these pockets of voluntary purchase, we interviewed floodplain and emergency managers, city planners, and community officials in counties with a large number or share of flood insurance policies outside the SFHA. In this brief, we detail the findings of these interviews and identify lessons that may be used to encourage more households across the US to insure against flood risk.