Flood Insurance Coverage Is Still in a ‘Death Spiral’ as Senators Try To Block Premium Hikes

The National Flood Insurance Program continues to make headlines, as those scrutinizing it continue to characterize the NFIP as being in an "actuarial death spiral."

The NFIP has chugged along the path of uncertainty for many years, experiencing 35 short-term congressional reauthorizations since 2017.

In a recent letter penned to FEMA, senators from Louisiana, Mississippi, West Virginia, Alabama, and Texas detailed what they are calling the NFIP’s structural crisis, triggered by a revised pricing system called Risk Rating 2.0.

The fight against 'Risk Rating 2.0' continues

FEMA’s initial analysis of Risk Rating 2.0 proclaimed that a staggering 96% of all NFIP policyholders would see premium decreases or average monthly increases of $20 or less. However, with the new pricing methodology’s five-year anniversary approaching, this is far from reality.

Last month, Sens. John Kennedy and Bill Cassidy as well as a handful of their colleagues attempted once again to curb the negative effects of Risk Rating 2.0, citing FEMA’s own estimate that 77% of policyholders now pay greater premiums.

According to the senators, FEMA continually fails to present underlying data to justify the premium hikes, so the senators are pushing for the cessation of Risk Rating 2.0 and disclosure of its full mechanics.

“In Louisiana and other flood-prone states, premium increases of well over 100% have forced tens of thousands of homeowners to drop coverage altogether,” wrote the senators.

“Each year Risk Rating 2.0 remains in place, participation continues to erode, the insurance pool weakens, and taxpayer exposure grows. Immediate action must be taken to stop the actuarial death spiral,” the letter continued.

Risk Rating 2.0 applies a “Where-How-What” approach to premium calculations, according to FEMA. It was designed to more accurately reflect each property’s flood risk based on its unique characteristics rather than primarily relying on elevation and flood zone. This outdated two-factor approach led to some properties with higher values and risk levels paying the lowest premiums—and vice versa.

“If one home was valued at $3 million and was across the street from the ocean, and another was four blocks from the ocean and valued at $300,000, the premiums for the maximum [NFIP coverage] limit of $250,000 would be very similar for both,” explains Brian Catalano, vice president of National Flood Insurance sales and underwriting at Texas-based AFR Insurance Services.

Actuarially, this doesn’t make sense. Not only would the $3-million home be more likely to flood due to its oceanic proximity, but it would also have a higher chance of filing a claim for the full $250,000 limit. This practice, according to experts and the senators, is what has forced the NFIP into tens of millions of dollars of debt.

FEMA enacted its rate-setting revisions to correct these inequities and create a more sustainable program, with assorted variables now supposedly playing a role in how much a policyholder pays for coverage, including distance to water, flood frequency, and replacement cost value. But when more factors are used to gauge a property's level of risk, there are more chances for it to fall into the "too-risky" category—and the higher premiums that typically accompany this designation.

This is why the senators argue that the NFIP is in an “actuarial death spiral” rather than a revival.

The numbers game: policy attrition vs. solvency

Because premiums have shot up dramatically, thousands of homeowners have adopted an “insurance-abandonment” mentality and chosen to forgo flood insurance coverage completely. 

To that end, NFIP enrollment has trended downward since the late 2000s. A record 5.7 million policies were in force in 2009, but throughout almost two decades, the nation’s primary flood insurance provider has lost 1 million policies.

But is Risk Rating 2.0 really to blame?

Since its rollout commenced in October 2021, new policy purchases have declined up to 39%, according to a recent research article. Similarly, existing policyholders have canceled coverage at a maximum rate of 13%.

Despite many past calls for comprehensive NFIP reform, this wasn’t FEMA’s intent behind Risk Rating 2.0, Chip Merlin, insurance attorney at Florida’s Merlin Law Group, tells Realtor.com®. But the notable issue is that the NFIP has maintained the same maximum coverage limits—$250,000 for single-family homes—for over 20 years without adjusting for inflation.

Merlin hears one question repeatedly, particularly now as affordability issues have taken hold: “Why should I buy flood insurance if it costs so much and pays so little?”

As the senators urge FEMA to "restore a rating structure that supports broad participation and program stability," they will need to join forces with prior congressional attempts to align the NFIP's statutory coverage limits with the conventional mortgage limits of Fannie Mae and Freddie Mac to achieve their ultimate goal.

Mortgage closings caught in a vicious cycle

Declining policy numbers place the NFIP in a classic catch-22 situation: Does it continue hiking up premiums to remain financially solvent, or does it lose the risk pool entirely?

FEMA reports that only 4% of homeowners carry flood insurance to begin with. Fewer policies means a smaller pool for paying claims, so the NFIP increases premiums to offset the loss, which could drive even more policyholders away.

An unstable insurance market, driven by insurmountable premiums, insufficient coverage limits, and mandatory-purchase requirements, creates the ultimate hurdle to homeownership.

“A mortgage market that requires flood insurance but has no provision for flood insurance at an affordable price is a market that makes homeownership economically unfeasible [for] the flood-prone areas,” says Cody Schuiteboer, president and CEO of Michigan mortgage brokerage Best Interest Financial.

With quoted flood insurance premiums exceeding estimates by 300%, 400%, or even 500%, according to Clever Offers’ Customer Success Manager Sain Rhodes, both lenders and homebuyers are immersed in a living nightmare of unmarketable debt-to-income ratios.

“It is unwinding real estate transactions right now, in escrow, after families have already made emotional and financial commitments to a home,” she says.

Rhodes details one example in which her client was two weeks out from closing. He cleared mortgage underwriting and secured a competitive interest rate, but it all came crashing down once he received a flood insurance quote for his loan’s mandatory-purchase requirements.

“The quote was $4,800 a year, compared to the neighbor's grandfathered rate of $900,” says Rhodes. “As a result, the buyer's debt-to-income ratio exceeded the lender's 43% threshold. The deal fell through.”

The homebuyer didn’t just lose his future home—he also lost his valuable time and costs for the property inspection and appraisal. This, Rhodes emphasizes, is a typical day in the current market.

And homebuyers aren’t the only victims of this broken system. Sellers are also fighting an uphill battle, When one closing fails, sellers “must relist the property, often at a lower price, and face the same issue with the next buyer," Schuiteboer notes.

As Rhodes explains, “When a buyer's flood insurance premium doubles or triples in the final stretch of closing, it does not just kill one deal—it erodes trust in the entire homebuying process.”

Home values plunge after the death spiral

Consumer demand shifts as coastal and other high-flood-risk neighborhoods become unmarketable due to affordability concerns and rising climate risk. And property values suffer as a result, putting nearly $1.5 trillion in net losses on the line, according to a 2025 report from First Street.

The climbing costs of homeownership are also making post-flood recovery nearly impossible for existing property owners. Even if they carry flood insurance, their coverage amounts are likely insufficient for today’s construction costs because of the NFIP’s 20-year-old limitations.

Merlin experienced this exact scenario within his own community after Hurricane Helene.

“I can’t tell you how many people just did not rebuild and … just sold their [older] homes,” he describes. “And some just left.”

Falling home values have the ability to cause a full-scale economic domino effect. Homeowners lose their greatest financial asset, mortgage-default rates grow, financial institutions struggle, municipal tax revenues decline—the list goes on and on. These repercussions may disproportionately impact low-income households unable to relocate or afford higher-value homes and communities of color more likely to live in flood-prone cities due to the historical practice of redlining.