From the Federal Reserve Bank of New York's Liberty Street Economics blog, August 7:
Recent natural disasters have renewed concerns about insurance
markets for natural disaster relief. In January 2025, wildfires wreaked
havoc in residential areas outside of Los Angeles. Direct damage
estimates for the Los Angeles wildfires range from $76 billion to
$131 billion, with only up to $45 billion of insured losses (Li and Yu, 2025).
In this post, we examine the state of another disaster insurance
market: the flood insurance market. We review features of flood
insurance mandates, flood insurance take-up, and connect this to work in a related Staff Report
that explores how mortgage lenders manage their exposure to flood risk.
Mortgages are a transmission channel for monetary policy and also an
important financial product for both banks and nonbank lenders that
actively participate in the mortgage market.
Flood Damages and Insurance Coverage
The U.S. has sustained substantial and largely uninsured damages from
flooding over the past fifteen years. The chart below displays the
cumulative damages from flooding in the U.S. and the cumulative
insurance payouts on these damages, starting in 2010. Between 2010 and
2023, the direct property damage from flooding totaled nearly
$144 billion (in 2023 USD). In the same period, insurance payments on
property damage from the National Flood Insurance Program totaled
approximately $50 billion (in 2023 USD)—just 35 percent of the direct
damages. These damage estimates understate the full economic cost of
flooding by excluding indirect damages (for example, lost income and
production associated with floods).
Cumulative Flood Damages and Insurance Payments, 2010‑23
Sources: Authors’ calculations, NOAA Storm Events Database, FEMA. Notes:
Both damages and insurance payments considered are restricted to those
in the fifty states and District of Columbia, excluding damages and
claims in U.S. territories.
Insurance Mandates
What does the flood insurance market look like and who has to
purchase flood insurance? Flood insurance in the U.S. is almost
exclusively provided through the National Flood Insurance Program
(NFIP), which is managed by the Federal Emergency Management Agency
(FEMA). In its role administering the NFIP, FEMA designates special
areas with elevated flood risk, known as 100-year flood zones. A
100-year flood zone is a FEMA-designated area with an annual probability
of experiencing a major flood of at least 1 percent (that is, at least
one major flood is expected every 100 years). With little exception,
flood insurance is required to obtain a mortgage for a property in
100-year flood zones—areas that cover roughly 5 percent of residential
properties.
Although these flood-prone areas are mostly concentrated in coastal and
riverine areas, smaller pockets exist across the country. The chart
below shows the county-level proportion of properties covered by a
100-year flood zone for the contiguous states. Nearly 20 percent of all
properties located in one of FEMA’s 100-year flood zones are located
within one mile of the coast, but the majority are located further
inland—approximately 60 percent of properties inside a 100-year flood
zone are located more than ten miles from the coast....
Brian Harmon
had just finished spending over $300,000 to fix his home in
Kingwood, Texas, when Hurricane Harvey sent floodwaters “completely over
the roof.”
The six-bedroom house, which has an indoor swimming
pool, sits along the San Jacinto River. It has flooded 22 times since
1979, making it one of the most flood-damaged properties in the country.
Between
1979 and 2015, government records show the federal flood insurance
program paid out more than $1.8 million to rebuild the house—a property
that Mr. Harmon figured was worth $600,000 to $800,000 before Harvey hit
late last month.
“It’s my investment,” the 49-year-old said this summer, before the hurricane. “I can’t just throw it away.”....
