Flood insurance reform: What the National Flood Insurance Program covers, why it struggles, and what could change

Flooding is a major coverage gap for homeowners

Many homeowners assume their standard policy will step in after a flood. It will not. Homeowners’ insurance does not cover damage caused by flooding, defined as water traveling along or under the ground. To protect a home and belongings from flood-related losses, a separate flood insurance policy is required.

This gap matters because floods can produce large, sudden losses that are difficult for households to absorb. Yet the decision to buy flood coverage is often delayed until after a disaster, when it is too late to insure against the damage that has already occurred. That dynamic has helped push flood insurance into the center of policy debates, particularly around the federal program that writes most of the coverage in the United States.

What the National Flood Insurance Program is and why it exists

Most flood insurance policies are underwritten by the National Flood Insurance Program (NFIP), which sits within the Federal Emergency Management Agency. The program was established in 1968, in part because flood insurance was not widely available in the private market. It was also designed to reduce demand for federal disaster assistance and to include provisions intended to reduce flood risk.

In practice, the NFIP acts as the backbone of flood coverage for millions of property owners. Homeowners can purchase a federal flood policy directly from the program or through a private insurer that sells NFIP policies. Alongside that federal footprint, some private insurers sell their own flood policies on a limited basis, particularly for properties they believe are overcharged by the government program.

How the program is funded

The NFIP’s activities are funded largely by premiums and fees paid by policyholders. The federal budget contributes a smaller amount, helping pay for flood risk mapping. Because the program is intended to serve the public interest—promoting “sound land use” and minimizing exposure of property to flood losses—some argue that a larger share of flood risk management costs should be borne by taxpayers rather than by policyholders alone.

That funding debate is not academic. It goes to the heart of the program’s financial challenges and the trade-offs policymakers face when deciding whether to raise rates, increase taxpayer support, or adjust benefits and eligibility.

How many people have flood insurance? The picture is incomplete

It is difficult to determine exactly how many homeowners have flood insurance. What is clear is that the NFIP remains the dominant provider. The program had just over 5 million policies in force as of January, and the mix of policy types offers a snapshot of who relies on it:

• Approximately 69% of NFIP policies were on single-family homes.
• About 20% were on condominium units.

There is no definitive source on how many private flood policies are in force nationwide. One expert estimate suggests private policies represent only about 15% of all flood policies sold nationally. Even if that share grows, the federal program’s design and pricing will continue to shape the broader flood insurance market.

Why flood insurance take-up is falling in some places

In recent years, the number of flood policies has been dropping across the country. Two drivers stand out: concerns about cost and a tendency among consumers to underestimate flood risk. The result can be strikingly low coverage levels even in places that have recently experienced severe flooding.

Nebraska provides one example. Despite record flooding in the Midwest, the state has fewer than 10,000 flood insurance policies for almost 2 million residents. The damage from that flooding is expected to exceed US$1 billion. While population is not the same as the number of insurable properties, the contrast underscores how thin flood coverage can be in areas that do not see themselves as flood-prone—until they are.

Underinsurance is also a problem in hurricane-prone regions. In Harris County, which includes Houston, experts estimated before Hurricane Harvey in 2017 that only about 15% of homeowners were insured for floods, even though the percentage should be higher in areas near coastlines.

Loss data after major storms further illustrates the gap between damage and insurance coverage. Real estate data company CoreLogic estimated that approximately 75% of flood losses from Harvey were uninsured. For Hurricane Irma, the figure totaled about 80%.

Why homeowners skip flood insurance—even when risk is high

A number of factors affect a homeowner’s decision to buy flood insurance. Risk perception is central: people who believe their exposure is high are more likely to purchase coverage, all other things equal. But perception is not always aligned with reality, and that mismatch can be amplified by confusing rules and limited information.

There is also a mandatory purchase requirement intended to force owners of mortgaged homes in areas at high risk of flooding to buy insurance. Even so, it is estimated that only about half of those homeowners comply. That gap suggests that mandates alone may not be enough without consistent enforcement, clearer communication, and pricing that does not discourage participation.

Misunderstanding plays a role. One reason some homeowners do not buy flood insurance is that 43% incorrectly believe their homeowners’ insurance covers flood losses. Other factors include:

• A lack of information about flood risk and insurance options.
• The difficulty of calculating flood risk.
• An expectation that government disaster assistance will fully cover uninsured flood losses—something that is rarely the case.

These factors combine into a familiar pattern: many households remain uninsured or underinsured until a major event reveals the financial exposure.

What an NFIP policy covers—and what it does not

NFIP coverage is structured with clear caps. A homeowner can purchase coverage on a dwelling up to $250,000 and coverage for the contents of a home up to $100,000. The policy does not cover costs associated with “loss of use” of a home.

Those limits have been in effect since 1994. Over time, they have become less adequate as replacement costs for homes and the actual cash value of contents have increased. One practical consequence is that some homeowners purchase additional flood protection from private insurers to cover any shortfall above the NFIP limits.

For consumers, the key takeaway is that flood insurance is not just a yes-or-no decision. Even insured households may face meaningful gaps if coverage limits do not match the value of the structure and contents, or if they assume “loss of use” is included when it is not.

Why the program is under pressure: pricing, subsidies, and debt

The NFIP has faced considerable criticism over underwriting and pricing that have contributed to substantial debt. The core issue is straightforward: premiums have not been high enough to cover claims payments and other costs.

Subsidies are part of the picture. About 20% of the properties the program insures pay a subsidized rate. Beyond these explicit subsidies, many other NFIP policyholders pay premiums substantially less than what it costs to insure them. Pricing has been influenced largely by whether a home is inside or outside of the 100-year floodplain, a boundary that can make a major difference in premiums.

Major storms show how quickly losses can accumulate. The NFIP paid out:

• $8.7 billion to cover Harvey-related flood losses.
• $16.3 billion for Katrina.
• $8.8 billion for Sandy.

When premiums do not reflect the costs of these risks, the program’s finances deteriorate. Although Congress forgave $16 billion in debt in 2017, the NFIP still owed $21 billion to the U.S. Treasury as of September.

The “moral hazard” problem: when below-cost insurance changes behavior

Pricing that is below the full cost of risk does more than strain the program’s balance sheet. It can also exacerbate what insurers and economists call moral hazard. If homeowners can buy flood insurance at below-cost rates, they may be more likely to buy, build, or rebuild homes in flood-prone areas. They may also have diminished incentives to invest in flood risk mitigation, such as elevating a home.

This does not mean households are acting irrationally; it means incentives matter. When insurance prices do not send accurate signals about risk, the market can encourage decisions that increase exposure over time—raising the stakes for both policyholders and the public finances that backstop the program.

Past reform efforts: progress, backlash, and reversals

Legislative efforts to reform the NFIP and put it on firmer fiscal footing have produced mixed results. One major attempt was the Biggert-Waters Act of 2012, which made changes such as increasing premiums in order to make the program “more financially stable.” By moving rates upward, the reforms were intended to improve fiscal solvency.

However, an outcry from homeowners in high-risk areas led to the 2014 Homeowners Flood Insurance Affordability Act. That later law limited or rescinded many of the Biggert-Waters rate increases. The sequence illustrates a recurring challenge: reforms that improve financial stability can also raise affordability concerns, especially for households in high-risk areas where premiums can climb quickly.

Why an overhaul is back on the agenda

The debate has renewed urgency because the program that millions of Americans rely on after devastating floods is widely viewed as needing fixes. The Trump administration proposed a significant revamp of flood insurance pricing, with premiums calculated to more accurately reflect the actual flood risk individual homes face beginning in 2020.

More risk-based pricing can cut both ways. Some homeowners would see premiums rise, while others would benefit from lower rates. The distributional impact matters because it can influence participation: higher premiums may discourage some at-risk homeowners from buying coverage, even as the policy goal is to expand protection and reduce uninsured losses.

What “fixing” the NFIP could involve

At a high level, the program’s financial problems could be addressed in two broad ways: shifting more costs to taxpayers or increasing premiums closer to full-cost rates for most homeowners. There is also the question of benefits: raising total coverage levels is part of the discussion, given that the current caps have not changed since 1994.

Another challenge is participation. A key policy objective is to convince or compel more at-risk homeowners to buy flood insurance. That goal becomes harder if premiums rise sharply. One view is that increasing taxpayer support will have to be part of the solution so that expensive premiums do not become a deterrent for households that need coverage.

In other words, reform is not just about balancing the books. It is also about designing a system that can sustain broad participation, provide meaningful protection, and reduce reliance on disaster assistance that is often assumed to be comprehensive but rarely is.

What homeowners can take from the debate

Even as policymakers debate pricing formulas and funding, the basic consumer realities remain the same. Flooding is not covered by standard homeowners’ insurance, and the primary source of flood coverage for most households is a federal program with defined coverage limits and notable exclusions, including “loss of use.”

The broader lesson from recent disasters is that underinsurance is common, and uninsured losses can be widespread even in areas that have experienced major storms. As reforms are considered—whether through more risk-based pricing, higher coverage limits, or greater taxpayer support—the central question is how to build a flood insurance system that better matches the scale of modern flood risk while remaining accessible enough that households actually buy it.