National Flood Insurance A Disaster : Free Market Solution Work

Flood insurance that covers people and property that is repeatedly claimed for damage is not a workable solution to fixing the problem. The free market will do a much better job allocating resources, and for those that have used and abused the system by continuing to make claims, will have to awaken to the reality that they will have to pay for their inability to make sound decisions regarding their personal welfare.

National Flood Insurance Program is Financially Unsound
Source: Chris Edwards, "The Federal Emergency Management Agency," Cato Institute, November 18, 2014.

December 2, 2014

What's the most frequent hazard associated with natural disasters in the United States? Flooding, says Chris Edwards of the Cato Institute, who notes that more than 90 percent of natural disasters in the country involve flooding. This makes the federal government's National Flood Insurance Program (NFIP) especially significant.

Unfortunately, the NFIP is in dire need of reform. There are 20,000 communities that participate in the program, meaning that all homeowners and businesses in those areas are eligible to purchase federal flood insurance, and those communities must meet federal flood regulations. Today, there are 5.6 million flood insurance policies.

What's the problem? Edwards details a host of issues with the program, including:

• FEMA takes in only $3.5 billion in premium payments each year, meaning that it must borrow from the Treasury when payouts cost more than premiums. It has accumulated billions in debt as a result.
• One-fifth of policyholders receive subsidized insurance rates, while the rest pay "full" rates; still, says Edwards, those "full risk" rates are below-market rates. According to a recent study, NFIP premiums are half of what they need to be to meet costs.
• The program is required to accept all NFIP applicants, no matter how risky, and they must retain policyholders whose property is repeatedly damaged. Additionally, rates do not increase after claims are made.

Edwards notes that "repetitive loss properties" are only 1 percent of all policies, yet they constitute one-third of claims. He describes a $69,900 home in Mississippi that has flooded 24 times since 1978; since that time, the owner has received more than $660,000 from the NFIP.

The program incentivizes people to move into dangerous, flood-prone areas, says Edwards -- there are more than 16 million Americans living in "Social Flood Hazard Areas" today, up from 10 million in 1970. Edwards explains that individuals are willing to move into areas that they would otherwise stay away from because much of the risk is borne by government, which promises assistance in the event of disaster.

Edwards argues Congress should end the NFIP and replace it with a private flood insurance market that charges real premiums and can refuse to offer coverage in the event that development is too risky.