The effects of Hurricane Harvey on the state of Texas and of Hurricane Irma on Florida have brought a renewed focus to the National Flood Insurance Program (NFIP) and its future. The program was created by Congress in 1968 in the aftermath of severe floods. Increasingly severe floods had led many insurers to stop covering floods as part of standard homeowners’ insurance, instead of selling separate flood insurance policies that continued to rise in price.
As a result of the government backstop, homeowners living in flood-prone areas have largely been unable to acquire private flood insurance, as the federal government sells flood insurance at below-market rates, making it unprofitable for private insurers to offer the coverage. Homeowners living in flood plains aren’t required to take out flood insurance coverage, but those seeking to purchase houses situated in floodplains are required to purchase flood insurance if they seek any sort of federal mortgage assistance.
The National Flood Insurance Program already faced massive financial obligations, still being over $24 billion in debt in the aftermath of Hurricane Katrina in 2005 and Hurricane Sandy in 2012. In the aftermath of Hurricanes Harvey and Irma, the program only had about $1.5 billion on hand to cover flood insurance claims, plus the ability to borrow another several billion from the US Treasury, but still not enough to pay out all the expected claims. Congress ended up forgiving $16 billion of the NFIP’s debt to the Treasury in its disaster relief supplemental spending bill. That’s enough to allow the program to continue borrowing from Treasury and pay out claims from Harvey and Irma, but it still doesn’t fix the programs long-term problems.
Because the program charges below-market rates, it subsidizes development in flood-prone areas and encourages more people to live in flood plains, increasing the amount of damage that will eventually be done by floods and maximizing the amount of money the federal government will have to pay out on insurance claims. Rates don’t increase year to year based on risk, so some properties that flood year after year after year continue to pay the same below-market rates while still getting bailed out by the government time and time again.
Congress keeps kicking the can down the road, continuing to reauthorize the program without making substantial changes or debating its future. Because of the inability to charge market- and risk-based insurance premiums, the program will continue to bleed the government of billions and billions of dollars. It’s well past time to think about phasing out the National Flood Insurance Program and allow private insurers to service the market yet again. Only by enforcing market discipline will the costs of flood insurance be able to be borne by those facing the risks rather than being subsidized by the American taxpayers.