Challenges in Flood Insurance Coverage: A Call for Action

The United States is currently facing significant challenges in flood insurance coverage, exacerbated by factors such as increased rainfall, stronger storm surges, and development in flood-prone areas. Additionally, federal aid reductions and aging infrastructure, including river levees, worsen the situation.

According to Moody’s Rating analysts, inadequate flood insurance coverage shifts costs onto households, federal assistance programs, and increasingly onto state and local governments. These governments often cover expenses like debris removal, demolition of damaged structures, road repairs, and temporary housing.

Flooding events often lead to declines in local property tax revenues due to decreased property values. This impact is most severe in smaller, less affluent areas, causing downgraded credit ratings and higher borrowing costs for capital projects. Moody’s analyst Denise Rappamund noted that after Hurricane Harvey in 2017, some Texas counties faced financial deficits due to reduced property tax revenue. Similarly, Buncombe County, North Carolina, experienced a temporary credit outlook downgrade following Hurricane Helene in 2024, as per Moody’s Jennifer Chang.

With federal funding cuts to programs like those managed by FEMA, local governments might bear more financial responsibility for post-flood infrastructure rebuilding. Concurrently, some states have reduced or eliminated taxes, limiting their financial capacity to address disaster-related losses. For instance, proposed property tax cuts in Florida could potentially reduce local government revenues by up to $12 billion annually if enacted.

States such as Texas, Louisiana, Florida, and North Carolina, which frequently depend on federal disaster aid, may face increased vulnerability due to these changes. Louisiana has been the most reliant state, with federal disaster aid comprising over 5% of its revenue in recent years.

Participation in the National Flood Insurance Program (NFIP) has significantly declined, shedding around 470,000 policies from 2018 to early this year and losing 5.6 million policies since 2009. While private insurers have stepped in to fill the gap, overall flood coverage levels have not notably increased, according to Moody’s analyst Firas Saleh.

Moody's also highlights that federal flood maps might not accurately reflect the true scope of flood risks, as shown by discrepancies in Houston area flood map predictions. The risk of inland floods is likely to expand if key levee systems, many over 60 years old, fail under extreme weather conditions. The readiness of property-casualty insurers for these evolving risks varies, with some carriers taking proactive measures to enhance resilience, while others lag behind.