Read FEMA’s detailed responses to our questions about flood reforms here.

In an interview, FEMA Deputy Associate Administrator David Maurstad said the goal of Risk Rating 2.0 is to deliver “rates that are fair, easy to understand and better reflect a property’s unique flood risk,” which can also help the public figure out whether an area is safe to live in.

The initiative will reduce premiums for policyholders of “lower-value homes” who are “paying more than they should be paying,” he said, and those who take measures to flood-proof their properties like elevating homes on stilts.

But Maurstad was less clear about the fate of high-risk, coastal areas like Canarsie, where property values are high but rising premiums could easily upend fragile households. “There comes a time when you have to evaluate the program and make these types of hard changes because they’re important for the sustainability of the program,” he said. Only Congress has the authority to make NFIP policies affordable, he added.

A residential street in the Canarsie area. (Jorge Garcia for Vox and the Center for Public Integrity)

Officials fear ‘a huge foreclosure crisis’

What worries New York City officials is that communities like Canarsie could be left on their own to shoulder rising costs. “If we transition to risk-based pricing immediately, it would lead to a huge foreclosure crisis and that’s exactly what we do not want to do,” Bavishi said. “We feel very strongly that this is at its core about environmental justice.”

City officials are lobbying Congress to provide vouchers or some other discount on NFIP premiums for those who cannot afford them. FEMA itself has acknowledged how cash-strapped Americans are — a 2018 agency survey found many U.S. households would not be able to cover a $500 emergency expense.

Under the current NFIP, retrofitting a building is one of the few ways to qualify for premium reductions. A city study estimated a typical Canarsie homeowner would have to shell out up to $100,000 to modify a home, which would entail making the basement uninhabitable. The expense is out of reach for nearly everyone but real estate developers, who are increasingly building in the city’s most flood-prone areas.

Scholars like Paganini point out NFIP’s “one-size-fits-all” approach means “working-class people increasingly can’t afford the cost of living by the coast, but wealthier populations can.” The program also ignores the impact of discriminatory mortgage lending on communities of color.

Instances of “environmental gentrification,” where luxury development displaces low-income residents following a natural disaster, have played out in post-Hurricane Katrina New Orleans and storm-prone Miami-Dade County in Florida.

The Natural Resources Defense Council, an environmental group, supports FEMA’s pricing shift as a way to communicate risk to the public, but only if premiums are made affordable through some kind of program and the agency ramps up investment in flood prevention.

“You can have as much insurance as you want — the water doesn’t care,” said Anna Weber, a policy analyst for the group. NFIP shouldn’t punish vulnerable communities for living in risky areas, especially when racist real estate practices like redlining have long steered people of color into undesirable neighborhoods, Weber said. “Flood insurance has the potential to be the linchpin in our climate policy. Right now, it’s a liability.”

FEMA often cites a study showing every $1 spent on disaster mitigation returns $6 in benefits. But the agency spent $8.3 billion on such efforts from 2007 to 2016, a small portion of its total budget over the same period. Agency pamphlets outlining “low-cost” do-it-yourself projects to minimize flood risk tell property owners to “consult local architects, engineers, contractors, landscapers, or other experts in design and construction,” as well as secure “permits or other regulatory approvals” before making any changes.

Thalia Panton outside her home in Canarsie. (Jorge Garcia for Vox and the Center for Public Integrity)

Such an undertaking isn’t an option for Thalia Panton. Now retired, she lives on a fixed income — a chunk of which goes toward the $60,000 debt her family racked up from Sandy. Flood insurance has done little to alleviate the anxiety she feels when menacing clouds gather in the sky and start pelting the cement with rain.

“I haven’t been made whole and I guess I’ll never be made whole,” Panton said. Her voice hardens when she’s asked whether she’s considered leaving Canarsie. “I have no interest in selling my home, and I don’t want flood insurance to force me out. I don’t think that it can. I will find a way around it.”

Companies profit as flood insurance goes private

The NFIP was financially solvent for much of its history. But since Hurricane Katrina in 2005, it’s accumulated billions of dollars in debt, borrowing more and more from the U.S. Treasury as disasters hit.

The insurance industry, whose abandonment of the flood market nearly a century ago was a major reason the NFIP was created, now see the program’s woes as an opportunity to make money.

Much of what FEMA has been doing to recast its flood insurance program in recent years follows recommendations from the insurance industry. If the NFIP operated more like a private insurer, upping its rates, it would be easier for companies to compete for the less risky and more profitable policies they wanted. The NFIP would also pay for deals the industry has been trying to strike with the program for years.

Reinsurance, for instance. Every year, to avoid being overwhelmed by claims, private insurers like State Farm transfer some of their risk to reinsurers like Munich Re, handing over a cut of premiums in exchange.

The Reinsurance Association of America lobbied Congress in 2012 and 2014 to confirm FEMA’s authority to purchase reinsurance and to take out catastrophe bonds — a newer form of risk transfer. “Cat bonds” are high-stakes gambles that Wall Street players like hedge funds make on Mother Nature. If a storm devastates, investors could lose their cash, which goes toward paying claims. But if a storm underwhelms, investors keep their cash and take a hefty profit, leaving insurers to foot bills on their own.

Consumer advocates warned that a government agency entering into these deals amounted to easy Wall Street profits that would cost taxpayers money. Robert Hunter, a former NFIP risk manager and Texas insurance regulator, said reinsurance makes “no sense” for FEMA, which can borrow from the Treasury at low interest rates set by the federal government.

By comparison, reinsurance prices are set by private companies that need to turn a profit and tend to raise rates after major disasters. And countries that have relied on cat bonds have found the deals don’t always pay out as expected.

Floodwaters from Hurricane Katrina fill streets near downtown New Orleans in this 2005 photo. (AP Photo/David J. Phillip)

Nevertheless, Congress urged FEMA to see if reinsurance and cat bonds could work for the NFIP. For answers, the agency turned to Guy Carpenter, a company that brokers those very deals.

The resulting FEMA report in August 2015 found reinsurance would be more expensive than borrowing from the Treasury but could encourage private insurers to start competing with the NFIP, offering flood policies of their own. This could help the federal government reduce its share of flood risk over time as private insurers step up, the report found.

Months earlier, Guy Carpenter unveiled a new specialty practice to sell insurance products to big government clients to “relieve the burden on taxpayers” — meaning the company stood to profit if FEMA took its recommendation.

That’s exactly what happened.

By September 2016, Guy Carpenter had its first deal with FEMA. It’s been involved in all the NFIP’s private-sector deals since, helping the program secure nearly $6 billion in coverage for potential storm losses through reinsurance and cat bonds.

FEMA’s Maurstad said the deals have strengthened the NFIP’s finances and helped it avoid accumulating more debt. Guy Carpenter declined requests for an interview. Its parent company, Marsh & McLennan Companies, is now expanding its insurance offerings to include private flood policies that compete with the NFIP.

Consumer advocates wonder what FEMA expected other than a sales pitch. “Guy’s constantly involved in big deals for reinsurers,” said Hunter, now director of insurance at the Consumer Federation of America. “Of course, they’re going to say, ‘Here’s a wonderful idea.’”

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Frank Nutter, president of the Reinsurance Association of America, defended the new direction of flood insurance. Private insurers will provide consumers with more choice, he said, which could encourage greater adoption of flood coverage. Both reinsurance and cat bonds are reliable transactions that have helped the NFIP become more financially sound, he added.

But it’s not clear whether the benefits outweigh the costs. FEMA has paid roughly $886 million in premiums to the private insurance industry so far. This doesn’t include additional millions in commissions and fees FEMA has paid to a long list of contractors like Guy Carpenter to execute each deal, which the agency declined to fully disclose.

In the four years FEMA has purchased reinsurance, it has collected payment once. The agency recouped $1 billion in 2017 after hurricanes Harvey, Irma and Maria. Neither of the agency’s two cat bonds to date has resulted in a payout.

David Birnbaum, executive director of the Center for Economic Justice, argued that FEMA’s deals are about political expediency, not taxpayers. “If I can operate the NFIP using reinsurance and not have to go to the Treasury to borrow more money, that’s accomplishing two things,” he said. “It means I don’t have to involve Congress, number 1, and number 2, I don’t have to publicize that we’re losing money.”

Government at risk of being left on the hook for riskiest policies

Pressure to privatize the NFIP has been mounting for years, but efforts have sped up under the Trump administration. In 2017, Congress cancelled $16 billion of the program’s debt at the insistence of the White House, which claimed debt forgiveness was necessary to keep the NFIP running and “enable the private market for flood insurance to expand.”

The White House’s Office of Management and Budget provided a laundry list of NFIP reforms to help “stimulate development of private insurance markets,” many of which have now found life in Risk Rating 2.0.

More options for flood insurance could be good for some customers. But consumer advocates worry private insurers will “cherry-pick” the NFIP by insuring only low-to-moderate risk policies, which generate bigger profits. The NFIP could enter a “death spiral,” Birnbaum said, leaving it on the hook for the riskiest and least profitable policies.

That could further jeopardize the program’s stability and the availability of flood insurance for those most at risk — people living in places like Canarsie.

Canarsie’s Paerdegat Basin channel, with Manhattan in the distance. (AP Photo/Mary Altaffer)

Cherry-picking appears to be happening in Florida, which has heavily promoted private flood policies. Data shows private insurers covered 8% of policies statewide but only paid 3.8% of flood claims from 2018’s Hurricane Michael, which suggests they are backing less risky properties. Guy Carpenter itself agreed cherry-picking was inevitable, noting in its 2015 FEMA report that private insurers as “profit-seeking entities” were mostly interested in “lower risk, high net worth property owners.”

To gain an advantage, some insurers are hiring the same firm FEMA is using to revamp the NFIP. KatRisk produces catastrophe models, proprietary programs that price and assess risk. The firm’s models are being used by FEMA to develop Risk Rating 2.0 as well as private insurers in North Carolina looking to offer flood coverage for the first time. KatRisk co-founder Dag Lohmann said his firm aims to be “impartial and independent” and provides all users with “the same scientific input.”

Operating the NFIP like a private insurer comes with downsides that FEMA itself has outlined. A 2011 report by the agency found privatization scored poorly on affordability and ranked as the worst option for reducing public exposure to floods. That’s because, experts believed, the private sector could undermine efforts to make properties less flood prone.

Adaptation efforts have already suffered as a result of insurance, according to research by Paul O’Hare, a researcher at Manchester Metropolitan University in Britain focused on climate resilience. He found homes in the United Kingdom that repeatedly flooded were often reconstructed the same way each time and insurers routinely denied requests by homeowners to rebuild to a higher standard.

“There’s no incentive for insurers to encourage to build back better,” O’Hare said. Similar issues plague NFIP policyholders in the U.S.

The mismatch speaks to a larger issue of who is responsible for protecting communities from future disasters. By recommending property owners buy as much insurance as they can, FEMA puts the onus on individuals. But that distracts from what experts say is really needed to reduce flood risk: large-scale government action.

Sitting in her neighbor’s living room one autumn night, Thalia Panton and other Canarsie homeowners commiserated about their uncertain futures and the little government support they’ve received. Federal officials recently greenlit construction of a six-mile-long sea barrier along the eastern shore of Staten Island, another area in New York City hit hard during Sandy. But discussions about a far less extensive barrier to protect communities like Canarsie are in their infancy.

“It’s been seven long years,” Panton said, “and not a lot has happened.”