Poulton Associates, LLC
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One of the steps taken by President Donald Trump toward fiscal reform was the signing of an executive order establishing a Review Council for the Federal Emergency Management Agency (FEMA). This new oversight body, tasked with issuing a report within 180 days of its first meeting, creates an unprecedented opportunity to address one of the federal government's most inefficient programs: the National Flood Insurance Program (NFIP).
NFIP: A Costly Legacy of InefficiencyThe NFIP has operated at a chronic loss for decades, plagued by outdated pricing models and politically motivated subsidies. Even with the adoption of Risk Rating 2.0, the program remains grossly underfunded. Since 2005, the NFIP has averaged $2 billion in annual losses, and storms like Helene and Milton are expected to deepen its deficit by another $2 billion.
Despite these losses, the NFIP continues to offer below-market renewal rates, undermining the growth of the private flood insurance market and distorting consumer expectations of flood risk. The cost to U.S. taxpayers is staggering: an additional $96 billion in projected losses over the next 12 years, with a projected $36 billion in losses coming from rates that are inadequate to keep up with increases in building costs alone-unless reform occurs.
An Opportunity for the FEMA Review CouncilThe newly formed FEMA Review Council is now positioned to evaluate this unsustainable system. A key opportunity lies in reconsidering the federal administration of flood insurance.
By focusing on NFIP reform, the Council can:
— Reduce taxpayer exposure
— Advance market-based solutions
— Ensure that the NFIP fulfills its original mission: to help create a viable private flood insurance market that removes the funding of flood losses from taxpayers
Private Flood Insurance: A Market-Ready AlternativePrivate flood insurance providers, such as CATcoverage.com, have shown they can deliver better results by leveraging:
— Advanced risk modeling
— Flexible, tailored policy structures
— Actuarially sound pricing mechanisms
These insurers are ready to assume up to 90% of current NFIP policyholders, provided the federal government phases out subsidies within a reasonable time, such as a three-year glide path. Such a shift would:
— Protect taxpayers
— Increase consumer choice
— Incentivize flood mitigation and sustainable development
The Role of DOGE in Government ModernizationThe Department of Government Efficiency (DOGE), which is expected to collaborate closely with the FEMA Review Council, supports precisely this type of market-based reform. Its mandate to reduce federal waste aligns directly with the NFIP's needs. Working together, the Review Council and DOGE have an opportunity to assure significant cost reductions to taxpayers.
NFIP Rate Shortfalls: A Financial Reality CheckWhile FEMA claims a ten-year glide path to rate adequacy, data shows the agency is on a 15-year trajectory just to keep up with construction costs when inflation is factored in. The chart does not consider the impact of other rising NFIP costs, such as climate change and increasingly severe storms, the increasing concentration of NFIP risk in flood-prone areas, outdated flood maps, aging mitigation infrastructure, costly reinsurance, debt service obligations, complex claims management, regulatory compliance burdens, and public outreach and appeals processes.
Visit FairFlood.com for the full report.
Assumed Policies Undermine NFIP ReformAlthough the desired effect of NFIP Risk Rating 2.0 is to bring NFIP premiums in line with actuarial risk, FEMA took a paradoxical step when implementing the new system: it introduced the “policy assignment” protocol. Under this approach, homebuyers are allowed to assume existing flood policies and the discounted rates that come with them. When a property changes hands, the buyer can assume the seller's NFIP policy and effectively inherit its lower, subsidized premium. This includes discounts that predate Risk Rating 2.0, such as pre-FIRM subsidies or older map-based rating structures, even though those discounts are no longer available on new policies. It has been observed that this practice unfairly miscommunicates the true flood risk to homebuyers.
While FEMA officially ended grandfathering for new policyholders in 2021, existing grandfathered policies can still transfer when a home is sold. As a result of these “zombie grandfather” policies, the NFIP assures large taxpayer subsidies/losses for decades to come. Prolonging the financial burden on taxpayers and postponing indefinitely the transition to accurate pricing.
Assuming an existing policy enables the buyer to continue paying a rate that doesn't reflect their actual flood risk. In effect, this creates a de facto form of grandfathering that undermines the goal of full-risk pricing. As a result, even though FEMA projects a glide path toward rate adequacy, this loophole ensures that many properties will continue to be underpriced for years, stalling reform and adding to the NFIP's growing deficit.
Challenges and SolutionsTo ensure a smooth transition, the Review Council must address key implementation issues:
— Affordability Solutions: Use targeted rate subsidies only when necessary, such as needs-based subsidies, not broad rate suppression.
— Federal cooperation for the significant depopulation of the NFIP over an adequate time frame.
— Restoring the NFIP as a residual market mechanism to support an orderly flood market.
— Loss History Transparency: Require FEMA to share parcel-level claims data, as anticipated in the original legislation, a necessary step in any real effort to reduce the size of the NFIP.
— Improved Flood Mapping: Adopt vertically based flood zone definitions to better capture risk, ensure greater spread of risk by enlarging the policy base, and dramatically reduce the cost of creating NFIP flood maps.
— Require all NFIP policies to re-rate to full actuarial risk at the time of property transfer, even if the policy is assumed. This would eliminate the continuation of outdated discounts and ensure Risk Rating 2.0 reforms apply uniformly, resulting in greater fairness and financial sustainability for the program.
Reclaiming Congressional IntentThe original vision for the NFIP was clear: the NFIP was to serve as a facilitator of private market flood insurers, not a taxpayer-funded, money-losing flood insurance monopoly. In the combined efforts of DOGE and the FEMA Review Council, there is real hope that we can finally align the program with its founding intent and make a meaningful reduction to the federal spending deficit.
ConclusionThe FEMA Review Council's 180-day window offers a rare chance to implement data-backed, fiscally responsible reforms. The NFIP should not resist this moment-it should embrace it.
With a shortened glide path to risk-based pricing, and federal leadership committed to efficiency and lower cost, flood insurance can become cheaper and more sustainable for everyone.
Written By
Craig Poulton is CEO of Poulton Associates, LLC, administrator of the Natural Catastrophe Insurance Program at CATcoverage.com, the nation's longest-standing private flood insurance solution.
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