Fannie Mae Survey Underscores Opportunity to Raise Consumer Awareness About Flood Risk and Flood Insurance
Addressing climate change is a significant challenge. Recent years have seen frequent and severe natural disasters in the U.S., including floods. The frequency and intensity of major natural disasters pose risks for all stakeholders in the housing system, including homeowners, renters, lenders, investors, and insurers.
Recently, Fannie Mae conducted a national survey of homeowners and renters in the U.S. to better understand consumer awareness, understanding, and attitudes toward flood risk, flood insurance, and related resources. More than 3,500 people nationwide responded to the survey, with participants selected from and representative of areas with varying levels of flood risk. The survey focused on three categories of flood risk: high-risk 1 (100-year flood zone/SFHA), medium-risk2 (500-year flood zone/moderate risk), and adjacent areas3.
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Awareness of flood risk and insurance remains low for many individuals
Overall awareness of flood risk is low, particularly for those in high-risk zones
The initial signs are encouraging as 84% of respondents were aware that FEMA establishes flood maps and 50% claimed to have reviewed their flood maps. However, additional questions revealed that survey respondents have an overall low understanding of flood risk and flood insurance despite reporting general familiarity with both these topics. Flood risk understanding is low for those in high-risk zones even though these homeowners, due to their locale, are more likely to have had direct or indirect experience with flooding and are required to carry flood insurance if they have a mortgage backed by Fannie Mae, Freddie Mac, FHA, VA, or USDA.
For instance, slightly under 40% of the survey respondents who are in a high-risk zone accurately identified themselves as living in that zone. Furthermore, despite being required to have flood insurance if they have a mortgage, nearly 40% of respondents in a high-risk zone claim they do not have insurance because they do not live in a high-risk zone. A potential reason for the disconnect could come from the fact that flood insurance is sold separately from their homeowner's insurance (often through a different insurance agent or from a different company than their homeowner's policy). Insurance is also often escrowed along with the mortgage payment, and individuals may not notice these payments. Even if the borrower has flood insurance, the NFIP mandates the use of the flood zone "letters" (e.g., AE or V), versus more common language (e.g., high risk) in official communications, and that might obscure the level of risk for consumers.
Awareness of FEMA's NFIP and their own individual flood insurance coverage is poor
Consumers' familiarity with FEMA's National Flood Insurance Program (NFIP), and their own individual flood insurance coverage, is also low. Only about 54% of the respondents in high-risk zones claimed awareness of the NFIP, and the scores were lower across the other two zones. Furthermore, even though the NFIP is the primary source of flood insurance in the market (covering more than 90% of the market), only 53% believe their insurance policy is provided through the NFIP. Third-party brokers who provide insurance on behalf of FEMA could be a reason for the lower awareness, as consumers might mistakenly believe their broker provides the coverage. Additionally, only 44% of high-risk zone respondents, where insurance is mandatory for government-supported loans when the property is in an SFHA, claim to have flood insurance. Finally, for those individuals with flood insurance, 23% of respondents do not know what their policy covers. For example, NFIP coverage does not address additional living expenses for an individual displaced from his/her home, and these costs can quickly add up for complex or prolonged repair efforts.
People in medium-risk zones have an outsized perception of safety and are least prepared based on risk profile
Respondents in medium-risk areas were the least informed about flood risk compared with those in high-risk or adjacent areas relative to their risk profile – only ~5% of those in a medium-risk zone correctly identified their risk designation. This group also often had an outsized perception of safety, and they were the least prepared to respond to a disaster based on their flood risk profile. For individuals in this group, only 16% in the medium-risk zone are certain they have insurance, and 16% acknowledge taking preventative measures against future flooding.
People say they don't receive enough information prior to purchasing a home, and when they do, it is from less trusted sources
Respondents also indicated that they are not receiving enough flood risk information prior to purchasing a home – only 31% reported receiving information prior to moving into their home. Across the two main risk zones, 42% of high-risk zone respondents claimed to be informed versus only 24% of respondents in the medium-risk zone. As for those who did report receiving information, they said it was from less trusted sources. Real estate agents (44%), who often have the responsibility of providing flood-related information to consumers, and mortgage lenders (30%) were reported to be the leading providers of information but ranked only as respondents' fifth and sixth most trusted sources. By comparison, the government ranked overwhelmingly as the most trusted source of information (63%), followed by insurance agents (18%), family and friends (7%), and the internet (4%) rounding out the top four.
People take flood risk and insurance considerations into housing decisions, which presents an opportunity to better inform them
Personal experience with a flood event is not unusual and can lead to high out-of-pocket costs or even debt
Direct experience with a flood event is not isolated. One in eight respondents said they had personally experienced flooding – nearly half of those within the past five years. On average, respondents with flood experience received approximately $39,000 in insurance payouts while out-of-pocket personal expenses were about $7,400. For those with personal expenses, a concerning finding, nearly 20% of respondents needed to borrow money to address damages. Furthermore, flood insurance rarely addresses all damages – only 26% reported that their claim payout completely covered their damages. Nearly the same amount said they had to pay a lot out of pocket. More concerning, approximately 54% of respondents said the current overall cost of obtaining and maintaining flood insurance is a potential barrier to purchasing flood insurance due to affordability concerns. However, in the long run, paying an annual premium may be a good investment for homeowners when compared to the negative financial risk.
Flood risk negatively impacts how people think about future home purchase
Living in a high-risk zone is becoming less attractive for some people. Overall, despite 48% of respondents already saying they have or think they have flood insurance, 56% of respondents claim they 'definitely' or 'probably' would not move to an area where flood insurance is required. In terms of the current state for individuals, a considerable number of people already living in any of the three risk zones said they would want to avoid high-risk zones for their selection of a future home. The survey also showed that awareness of flood risk may influence their future home purchase expectations. Approximately 78% of all respondents said they 'definitely' or 'probably' would not move to an area with high flood risk. Of that, 72% of people in high-risk areas and 82% of people in medium-risk areas said they would not move to a high flood risk area.
People are generally OK with mandatory insurance in high-risk areas
One positive finding from the survey was that respondents were generally comfortable with using flood insurance as an option to mitigate risks. About 67% of respondents thought insurance should be mandatory for high-risk properties, while only 16% did not agree it should be mandatory. However, although 50% of the respondents believe that insurance is somewhat affordable, about 25% of respondents thought that flood insurance was 'not very' or 'not at all' affordable. Furthermore, 31% of respondents with insurance are 'very' or 'extremely' concerned about rising premiums. (This survey was taken before the rollout of FEMA's Risk Rating 2.0, an initiative to establish more risk-based pricing for flood insurance, which could lead to higher premiums for certain populations.) In terms of how respondents viewed these topics with respect to their current situation, about 20% of respondents said they are 'extremely' or 'very' concerned that their current home will be required to have flood insurance, or that their current home will experience a decrease in property values due to a high-risk designation.
The government is the most trusted source for flood risk and insurance information
Respondents reported the government was by far the most trusted source of insurance information at 63% relative to other sources; the next most trusted source was insurance agents at 18%. Furthermore, when it comes to risk, 65% of people trust the government the most to evaluate their property's flood risk. The next most trusted source was internet resources at 11%. For respondents who reported reviewing community flood maps, FEMA's website (47%), local community websites (32%), and their local official's office (12%) are the top three sources for information.
Given response rates by self-reported race and ethnicity, we had to combine minorities into one grouping to allow us to obtain statistically significant results. Given that not all respondents are eligible to answer all questions or question choices, resulting in a smaller number of responses, not all questions yielded statistically meaningful results for minorities. That said, the results from our initial study are that minorities are less aware of flood zone risks and insurance programs when compared to non-Hispanic Whites. Only about 26% of minorities were aware they live in a high-risk flood zone compared with 40% for non-Hispanic Whites. Similarly, in high-risk zones, only approximately 46% of minorities were aware of the FEMA NFIP compared with 56% for non-Hispanic Whites. Finally, minorities in high-risk zones were also less likely to have been informed about flood risk (35%) when moving to an area versus non-Hispanic Whites (44%). In terms of factoring flood risk and insurance into future decisions, we generally observed statistically similar results for minorities when compared to non-Hispanic Whites. These are initial findings and further research is needed in this area.
Floods can be devastating for so many communities, especially for underserved communities and consumers without flood insurance coverage. The results of this survey indicate there are opportunities to educate homeowners and homebuyers about the risks of flooding. There are also opportunities to address consumer perceptions and behaviors to help them better understand the financial risks associated with flood events. Additionally, if consumers increasingly prefer homes that are less prone to flood risk, it may spur retrofitting or other community resiliency actions to mitigate risk.
There is more the housing industry, government institutions, and other stakeholders can do to increase communication and access to reliable information on flood risk, and to make it easier for consumers to make informed choices about whether flood insurance is right for them. We will continue to seek opportunities to learn more about this topic through additional nationwide research, as well as targeted studies on underserved communities. Furthermore, we believe that improving risk communications to consumers is critical, and will look for ways that we, and others, can contribute to informing consumers about their risk.
To learn more, read our Fannie Mae survey research, "Consumer Flood Risk Awareness and Insurance Study".
Fannie Mae recently updated the KnowYourOptions.com website to provide reliable resources for consumers, and we remain committed to helping homeowners and renters with information, services, and products to navigate the impacts of a changing climate.
The author thanks Steve Deggendorf, Tim Judge, Sarah Truman, Akash Karlapudi, Clark Poland, Michael Lacour-Little, Ying Pan, Mark Palim, and Alex Farley for valuable contributions in the creation of this commentary and the design of the research. Of course, all errors and omissions remain the responsibility of the author.
1 A property is designated to be in a high-risk zone if its associated FEMA flood zone starts with "A" or "V." Collectively these zones are referred to as Special Flood Hazard Areas and are associated with NFIP requirements.
2 A property is designated to be in a medium-risk zone if the property is not in a high-risk zone but has substantial risk according to available sources, namely:
- Its associated FEMA flood zone starts with "B" or “X" (shaded) for the 500-year flood zone OR
- If available vendor model predicts a depth of > 1 foot at 1% probability
- The inclusion of this factor was added to broaden the reach of a medium-risk zone beyond FEMA’s definition for survey purposes. There were 1,597 respondents identified as having medium-risk and this factor was only applicable to approximately 2% of the respondents.
3 A property is designated to be in an adjacent-risk zone if its distance to the nearest water body is less than 1,500 feet AND the point elevation of the property is less than 30 feet. Adjacent rating excludes properties already included in high- or medium-risk. Due to the complexities of flood zone shapes, proximity to a waterbody may or may not also indicate proximity to a 100-year or 500-year flood zone.