A Fraying Safety Net

Lawmakers established the National Flood Insurance Program in 1968 because private insurers largely refused to offer affordable coverage for floods, the leading cause of property damage. Standard homeowners and renters policies typically exclude flood-related losses, and only flood insurance covers the cost of rebuilding after floods.

In addition to addressing the massive protection gap caused by the absence of private flood insurance, the creators of the federal flood insurance program sought to incentivize community-wide adoption of risk-reduction measures to mitigate future flood damage. Municipalities must adhere to certain flood plain management regulations, including specific standards for where and how housing should be built, for their residents to be able to purchase flood insurance through the NFIP. The vast majority do; there are 22,600 participating communities compared with less than 2,300 nonparticipating ones.

Anyone who lives in a high-risk jurisdiction called a Special Flood Hazard Area and has a government-backed mortgage is required to purchase flood insurance. Most people buy policies through the federal program, though a growing number have opted for private alternatives in recent years, since regulators have implemented rules requiring lenders to accept such policies. This is a trend that Neptune and others hope to turbocharge in the current environment. That presumably includes shutdown opportunist Russell Vought, director of the Office of Management and Budget and a key architect of Project 2025, which advocated for privatizing the federal flood insurance program.

FEMA has long encouraged people living outside Special Flood Hazard Areas to purchase flood insurance, preferably through the NFIP, since that would widen the program’s policy base. Including households with lower, but still significant, flood risks would protect more people and alleviate fiscal pressure.

Some lenders require flood insurance outside of designated high-risk areas. In addition, if a property has received federal disaster assistance in the past, current occupants must have flood insurance to qualify for future disaster aid. Because most communities nationwide comply with federal requirements for participation in the NFIP, the number of households for whom private flood insurance is the sole option is small.

Although eligibility is widespread, participation in the federal flood insurance program is lacking. Even in Special Flood Hazard Areas, only an estimated 30 percent of houses are covered, and the proportion is lower elsewhere. This reflects the limits of existing mandatory purchase requirements — not everyone has a government-backed mortgage, and flooding happens outside of high-risk areas, which are woefully undermapped as it is.

Good insurance design calls for pooling various levels of risk. But due to FEMA’s inadequate flood maps, which limit the scope of the agency’s mandatory purchase requirement, federal flood insurance is obtained overwhelmingly by households in the most hazardous areas. This concentration of risk has caused financial strain, especially as fossil-fueled climate destruction continues to escalate flooding disasters.

What’s more, the current government shutdown is far from the first time the NFIP has been left in limbo. The last time Congress fully reauthorized the program was in 2012, and that five-year authorization expired in 2017. In the eight years since, lawmakers have passed thirty-three short-term reauthorizations to keep the program funded, most recently in March. Democrats and Republicans have introduced separate government funding bills that would keep the NFIP running for several weeks. Years of temporary extensions have caused uncertainty about operational continuity, and the lack of long-term stability precludes sorely needed reforms and investments.

As a result of chronic underfunding, the federal government’s flood maps, used to determine where flood insurance is mandatory, tend to be incomplete, outdated, and not reflective of all potential flood risks, including those that the fossil fuel–driven climate crisis is making ever more likely. FEMA bases its maps on tiered flood zones, but from 2014 to 2024, roughly three of every ten federal flood insurance claims came from households outside of high-risk areas.

In 2018, FEMA set a “moonshot” goal of doubling flood insurance coverage and quadrupling investment in flood mitigation by 2022. The agency asserted that budding private flood insurance companies would play an important role in doubling coverage, with one official arguing that “the greatest proportion of that growth will happen in the private market.”

Consumer advocates, meanwhile, have made the case for increasing participation in the NFIP by expanding the mandatory purchase requirement beyond high-risk zones and making flood insurance an opt-out component of the homebuying process.

In a recent letter urging Congress to reform the federal flood insurance program, Americans for Financial Reform and ten other organizations called for an investment of $15 billion to $20 billion to update and expand federal flood maps. According to the coalition, this would “help the program fulfill its mission to protect more households, unlock the NFIP’s incentive structure to promote resilience in newly at-risk areas, and put the NFIP on sounder financial footing by growing the program, diversifying its geographic footprint, and providing coverage to more moderate-risk properties.”

For its part, FEMA has identified expanding flood insurance coverage as a key priority for the NFIP. In addition, the agency’s 2022–2026 strategic plan cited increasing the number of properties with flood insurance as essential to building a “climate resilient nation.”

However, the agency’s acting administrator, David Richardson, rescinded that strategic plan in late May, just days before the start of hurricane season.

That development could benefit Neptune Insurance Holdings and its peers. Burgess told Politico earlier this month that Neptune has been in touch with Trump’s Federal Emergency Management Agency Advisory Council about “how we think private flood can pick up the mantle and really serve most of the need.”

Neptune Rising

Neptune was founded in 2018 by Jim Albert and Bill Martin, a pair of insurance executives who sought to use AI-powered risk analysis to facilitate the purchase of private flood insurance.

Burgess, who cut his teeth at Morgan Stanley and the private equity fund Artesia Capital Management, put nearly $2 million into Neptune in 2018 and became CEO of the Florida-based company a year later. Burgess, who also cofounded and still runs the Florida-based residential real estate company TRB Development, has claimed that closing the flood insurance gap “is not just achievable, it’s our responsibility.” Neptune highlights its ability to provide more coverage with a shorter waiting period.

Neptune does not provide coverage directly. Rather, as an underwriting intermediary, the company uses its “Triton” AI tool to assess and price flood risks. Then, its partnered insurance firms sell the ensuing policies (and commit to pay out claims), with Neptune making money on commission. According to Neptune, its carriers offer policies in all fifty states plus Washington, DC.

Neptune is not the only private flood insurer licking its chops amid the government shutdown.

John Dickson, president and CEO of Aon Edge, another underwriting intermediary, recently told NPR, “We’ve seen an incredible increase in interest and activity, a great number of quotes coming in that we haven’t before.”

Brad Turner, vice president at Burns & Wilcox, an insurance wholesaler that provides flood policies, called the government shutdown a “massive opportunity” for private actors to prove their mettle. “We’re seeing a ton of new agents reaching out for the first time,” Turner recently told Reuters. “I do expect that if this goes on long term, it will push a lot of business to the private market.”

As Burgess and his peers seek to capitalize on the shutdown, Neptune is also being boosted by First Street, a leading climate risk analytics firm whose property-level assessment tool is used by real estate platforms and mortgage lenders, including Zillow. When users type an address into First Street’s online tool, it generates historic and projected information about climate risks — including flood, fire, wind, air quality, and heat — for that location. When a user clicks the flood insurance drop-down box, they are prompted to buy a policy from Neptune, rather than through the NFIP.

Last month, the Connecticut Insurance Department unveiled a free, state-based version of First Street’s subscriber-only national website. The company’s Connecticut tool temporarily steered consumers toward Neptune rather than the federal flood insurance program.

After the Connecticut Insurance Department was asked about the matter, First Street removed the Neptune advertisement from the state website — but it did not modify its main search engine.

Given that most households qualify for the NFIP, it’s unclear why First Street would only highlight Neptune. When asked about its decision to promote the company, a First Street representative said that it “does not comment on our customers or partners.”

“No Holistic Thinking”

If Burgess gets his way, the NFIP would exist only as a “residual market” for the 5 percent of households that he says Neptune won’t insure. The company’s new report envisions the government acting as “a safety net of last resort, not as a competitor to private insurers.” However, if private insurers cover only relatively less risky homes, that would leave the federal flood insurance program with exclusively high-risk properties, compounding its financial difficulties.

Burgess’ end goal could also have negative consequences for consumers.

Like other flood insurance providers, Neptune operates in the “nonadmitted” insurance market. Nonadmitted insurance — also known as excess and surplus lines — emerged to cover rare, specialty items such as expensive artwork. It was not intended to safeguard millions of homes against increasingly common flooding risks.

Importantly, nonadmitted insurers are subject to less regulatory scrutiny, a fact that Neptune cites as central to its business model. In a filing with the US Securities and Exchange Commission, the company acknowledged that “regulatory changes affecting the [excess and surplus] market or the imposition of admitted-market requirements on Neptune could have a material and adverse impact on our business.”

Nonadmitted carriers do business through licensed managing general agents like Neptune and Aon Edge, or through other kinds of wholesale insurance brokers such as Burns & Wilcox. Unlike their admitted counterparts, these insurers are exempt from complying with state regulators’ rate approval processes, and they do not contribute to state insurance guaranty funds. These funds step in to help policyholders when an admitted carrier goes bankrupt.

The fact that Neptune’s partners “are able to become insolvent and leave policyholders holding the bag . . . makes them far less protective” than NFIP policies, said Jordan Haedtler, policy adviser to the Insurance Fairness Project, a group advocating for sustainable and equitable solutions to the climate-driven property insurance crisis.

In a statement provided to the Lever, Burgess countered that “almost the entire US flood market already operates outside the traditional admitted insurance system — starting with the [NFIP] itself, which is exempt from state regulation.” Burgess said that because flood insurance standards “are imposed by federal law, the typical historical concerns people raise about the [excess and surplus] market simply do not apply in the same way to flood.”

However, the NFIP differs from its private competitors in an important regard: If a private flood insurer like Neptune were to go bankrupt, its customers may be out of luck. NFIP policyholders, by contrast, would likely be financially protected, given the federal government’s ability to forgive its own debt. In 2017, Congress wiped out $16 billion of the program’s debt, enabling it to pay claims for Hurricanes Harvey, Irma, and Maria. Progressive advocacy groups have furthermore argued that the NFIP should be able to automatically cancel its debts each year.

And unlike the private flood insurance market, the federal program contains mechanisms for public accountability and democratic reforms. For instance, in response to criticisms that the NFIP has subsidized real estate development in flood-prone areas, FEMA has taken some steps to minimize regressive outcomes while also exploring how to preserve affordable housing.

Compared with NFIP policyholders, Neptune policyholders also don’t have as much recourse to challenge low damage estimates, claim denials, or other anti-consumer practices. Two-and-a-half years after Hurricane Sandy, elected officials pressured the NFIP to reopen all 144,000 claims stemming from the 2012 storm because numerous consumers complained that participating insurers had deliberately underestimated losses.

Although FEMA’s appeals process favored insurers most of the time, the private flood insurance market offers no public accountability mechanism at all.

Burgess is betting on Neptune’s ability to use AI to predict flood risk. “We’ve developed technology that enables flood to be an investible asset,” he recently told the Wall Street Journal. In 2024, the company acquired Charles River Data, “enhancing” its “in-house data science, artificial intelligence, and machine learning capabilities.”

But proprietary modeling is not foolproof. Analyses have shown that the black-box climate risk models developed by competing tech firms tend to differ more than they converge. Each model codifies a unique assessment of property-level climate risks, with significant implications for the resulting insurance premiums, real estate valuations, and residential mobility.

Publicly managed catastrophe models, by contrast, come with the crucial benefit of transparency. What’s more, the publicly backed federal flood insurance program also comes with requirements for smarter flood plain management.

“Not only are there fewer consumer protections with Neptune or any other surplus line,” said Haedtler, “but there’s also no holistic thinking about how and why, and even whether . . . development in a certain real estate market should go forward.”

Burgess seems to think that sending nonsubsidized price signals is sufficient to encourage communities to prepare for climate change. In his Politico interview, he claims that for a majority of households, where flood risks are relatively low, Neptune can provide insurance more cheaply than the NFIP. At the same time, Burgess says that “if we tell you it’s $12,000, maybe you shouldn’t buy that house.” And if Neptune declines to write a policy, “you should move,” he adds in a separate interview on CNBC.

In a statement shared with the Lever, Burgess said that the NFIP’s “decades of price subsidies created a profound misalignment between risk and price, which left homeowners and the banking system with a distorted understanding of their true exposure. Private flood [insurance] — by reflecting risk in the price rather than hiding it — is not perpetuating the [NFIP]’s problems; it is correcting the information failure the subsidies produced.”

Burgess described “an honest price signal” as the “starting point for both rational individual decisions and a functioning mitigation strategy.”

But research shows that “risk-reflective pricing” is ineffective at “changing where or how people live,” in part because moving is never easy, especially in a country where securing affordable housing is increasingly difficult. Plus, allowing private insurers alone to dictate residential decisions does nothing to promote the more sweeping actions — fossil fuel phaseouts, better land-use planning, and transformative investments in the built environment (including new construction in less risky areas) — that are essential to housing everyone safely. It’s unclear how Neptune would execute a “functioning mitigation strategy,” unless that means mass relocation.

“Expecting price signaling alone to solve this problem is only going to result in the reality that we’re faced with now, which is that these questions, including the very difficult questions of relocation, are determined by insurance companies and mortgage lenders rather than by publicly accountable agencies and elected officials,” said Haedtler. “A great advantage of [the NFIP] is, for all of its flaws, there is a community rating system that seeks to incentivize better flood plain management.”

What we should be doing in our warming world, said Haedtler, “is reconsidering public insurance programs in general.”

In a new issue brief, Birss from the Climate and Community Institute outlines what a just solution might look like. Birss recommends transforming the National Flood Insurance Program into an all-perils National Disaster Insurance Program, redesigning existing state insurer of last resort programs, and establishing new state “housing resilience agencies” to coordinate disaster risk mitigation and administer single-payer disaster insurance.

“Only a holistic response to this crisis, intended to ensure safe, affordable housing for all — rather than prioritizing insurance company profits — can fully address the interconnected risks communities face,” Birss argues.