National Flood Insurance Program incentivizes building in flood prone areas

Did you know there’s a home in Mississippi that has flooded 34 times in 32 years? And each time it has flooded, the federal government, through FEMA’s Federal Flood Insurance Program, has paid the owner’s claim.

The house, worth $69,900, has cost the government $663,000 in flood damage claims. That’s almost ten times the home’s worth and averages over $20,000 a year.

If insanity is doing the same thing over and over again and expecting different results, that aptly describes this federal program.  It essentially incentivizes home owners to remain in flood prone areas by bailing them out each time they are flooded.  And, as you might imagine, that’s finally caught up with the program, as USA Today reports:

FEMA's National Flood Insurance Program is the nation's main flood insurer, created by law in 1968 as private companies stopped covering flood damage. The program insures 5.6 million properties nationwide and aims to be self-sustaining by paying claims from premiums it collects.

Instead it's running deeply in the red. A major reason, a USA TODAY review finds, is that the program has paid people to rebuild over and over in the nation's worst flood zones while also discounting insurance rates by up to $1 billion a year for flood-prone properties.

Along with the huge losses from Hurricane Katrina, the generous benefits have forced the program to seek an unprecedented $19 billion taxpayer bailout.

As one critic succinctly points out, “if this were a private insurer, it would be bankrupt”. In fact, it with those business practices, it would have been bankrupt years, if not decades ago. And now, hat in hand, it goes to the taxpayer for a bailout.  $19 billion dollars worth of bailout.

As a government program, federal flood insurance covers anyone. It's similar to state-run programs that insure homeowners and drivers who cannot get private coverage. Policies cannot be canceled, and individual premiums cannot be raised based on claims payments.

“It is not run as a business,” [FEMA Administrator Craig ]Fugate said.

Congress' Government Accountability Office said in April that the program is “by design, not actuarially sound” because it has no cash reserves to pay for catastrophes such as Katrina and sets rates that “do not reflect actual flood risk.”

Raising insurance rates or limiting coverage is hard. “The board of directors of this program is Congress,” Fugate said. “They are very responsive to individuals who are being adversely affected.”

Or said another way, Congress has been “captured” by influential constituents who see no problem using their influence to burden taxpayers to subsidize the way of life they prefer – no risk building in areas prone to natural disasters.  It isn’t “regulatory capture” per se, but it could certainly be called “constituent capture”. It is certainly rent seeking. 

Whatever the name preferred, it is an abuse of the taxpayer’s money.

It appears the plan is to continue doing business as usual – providing cheap insurance to builders and homeowners who continue to build or rebuild in flood prone areas.  No fault risk taking subsidized by the federal government via taxes. So when you see stories like this, you know who to blame:

In Fairhope, Ala., the owner of a $153,000 house has received $2.3 million in claims. A $116,000 Houston home has received $1.6 million. The payments are for damage to homes and what's inside.

After all, the view’s beautiful, coverage cheap and can’t be canceled and the risk minimal in terms of dollar loss, so what incentive is there to relocate to an area less prone to flooding as long as the taxpayer is on the hook to subsidize that lifestyle and they keep paying?

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