Federal Flood Insurance: Primed for Disaster

With Virginia still recovering from the after-effects of Hurricane Irene, the Government Accountability Office posted a new study on its website, “Action Needed to Improve Administration of the National Flood Insurance Program,” along with congressional testimony by Orice Williams Brown, managing director of financial markets and community investment.

The story was a dismal one. The National Flood Insurance Program has accumulated $17.8 billion in debt and its continued need to borrow to cover flooding claims has “raised concerns about the program’s long-term fiscal solvency.”

The program suffers from a number of problems, not the least of which is the Federal Emergency Management Administration’s lack of goals, objectives or performance measures for the program, and the abandonment after seven years and $40 million of the program’s inefficient, 30-year-old claims management system. But the biggest problem is the insanity of NFIP’s ongoing subsidy of flood insurance. Average 2o1o premiums of $1,121 were discounted from the true cost of $2,500 to $2,800.

Not all problems are of NFIP’s own making. The program works within rules that make it impossible to run a fiscally solvent operation, no matter how efficient the administration. Says the GAO report:

NFIP is also required to accept virtually all applications for insurance and cannot deny coverage or increase premium rates based on the frequency of losses. Private insurers, on the other hand, may reject applicants or increase rates if they believe the risk of loss is too high. As a result, NFIP is less able to offset the effects of adverse selection—the phenomenon that those who are most likely to purchase insurance are also the most likely to experience losses. Adverse selection may also lead to a concentration of policyholders in the riskiest areas. This problem is further compounded by the fact that those at greatest risk are required to purchase insurance from NFIP if they have a mortgage from a federally regulated or insured lender. … Finally, by law, FEMA is prevented from raising rates on each flood zone by more than 10 percent each year.

Local governments are of little help.

FEMA relies on state and local governments and communities to implement parts of the program, which can limit the effectiveness of some of FEMA’s efforts. For example, communities enforce building codes and other floodplain management regulations in an effort to reduce the flood risk that insured structures face, but some communities may not have sufficient resources to enforce existing regulations. FEMA also relies on communities to administer grant funds that are intended to mitigate high-risk properties. However certain types of mitigation, such as relocation or demolition, might be met with resistance by communities that rely on those properties for tax revenues, such as coastal communities with significant development in areas prone to flooding. Finally, communities and individuals have sometimes mounted challenges to and resisted flood map revisions that place homes in higher-risk flood zones and would thus raise premium rates.

The GAO recommends a variety of congressional reforms, including the obvious, if politically unpopular one of raising insurance rates. The problem, authors suggest, is that many property owners will simply refuse to buy insurance of any kind, exposing FEMA to greater damage liability in the event of a disaster.

Here’s a solution that GAO didn’t recommend: Raise the insurance rates to a level consistent with sound actuarial principles, tell people they are not eligible for FEMA aid for flood damage in a disaster, and then let nature take its course. I can guarantee one thing: There will be a lot less building of multimillion-dollar houses on Atlantic coast beach front or other flood-prone areas. I cannot think of a single reason why that would be a a bad thing.

6 Responses to Federal Flood Insurance: Primed for Disaster

  1. the flood insurance program really symbolizes the “entitlement” mindset of a large number of people including those who claim to be small govt conservatives judging from the owners of 2nd homes and vacation homes on waterfront and ocean property.

    We provide them with the ability to conduct a business activity – the renting of beach homes.. and write the taxes and interest off as well as the insurance costs….

    even as both rich and poor are attacked from the middle as not proffering their “fair” share of taxes… many in the middle also expect govt subsidies that help their cause.

    untaxed health care benefits, pell grants, mortgage deductions… are just a few.. and then we have subsidized flood insurance….

    all of these “breaks” have real consequences ….. the home mortgage deduction rather than being limited to one principal residence at typical locality values.. has become a way for the govt to subsidize house flipping.

    health insurance has become a game of haves and have nots.. as fewer and fewer employers offer “free” (untaxed) health insurance when all other compensation is taxed.

    If you get it through your employer – great but if you have to pay out of your own pocket – the tax laws do not treat you the same way as those who have employer-provided insurance. and ..as a result… we get things like ObamaCare trying to … at least give everyone a crack at health insurance whether you are with a big employer who provides it or a small business that cannot afford to….

    finally flood insurance… primarily for people who purposely built not modest homes – on waterfront… when .. if they had to pay market insurance would not risk their money.

    All of these subsidies have real and adverse impacts on the Federal budget.

    we want to blame others.. the rich AND the poor….

    while insisting that the “perks” of the middle class stay intact.

    the subsidized flood insurance program is considered by some to be the great equalizer that lets people who are not rich – own a beach or waterfront home.. until of course some nasty hurricane comes along and carnage ensures … and the cry is for the locality to shout “help” and FEMA to come to the rescue.

    Don’t get me wrong…I think the govt SHOULD mobilize and render assistance during natural disasters but have you noticed of late that every gov (including those small govt conservatives) go running to FEMA at the first hard blow?

    FEMA should pay for public infrastructure but it should not be involved in private property IMHO..

    just another “libtard” perspective for Groveton…

  2. Flood insurance is only available from nfip. If you accept it, it comes with significant strings attached. They are designed to reduce the amount of flood damage over time. It is a flood insurance and a conservation program.

    Viewing it as a subsidy missunderstands the actual purpose.

  3. Counties that join NFIP must adopt and enforce the program’s rules of flood plain management in order to minimize future flood damage Supervisor Shirley Helmrichs believes the federal flood insurance program would have serious repercussions for homeowners. For instance, a home severely damaged by a fire could not be rebuilt unless it were constructed above the flood plain level, she reported. “It’s that noose,” said Helmrichs. “There’s strings attached that a lot of people don’t know about.

  4. The above quote comes from a story about a count that refused to join the flood insurance program because they believed it infringed too heavily on property rights, and the right to rebuild after a flood.

  5. two questions – what kind of flood plain management requirements are there for beachfront property?

    2. – if someone builds in a flood plain and publically-funded infrastructure is built to serve them – who should pay ?

    so even for the localities who don’t want the strings attached, – who pays for the infrastructure that is built to serve homes in a flood plain?

    FEMA tries to use the carrot/stick on homes in flood plains by agreeing to pay for them in a loss – ONCE. If you rebuild, then it’s on your dime the next time but again who pays to repair the roads, water/sewer, and other infrastructure?

    but the most damning problem with FEMA as pointed out in this article is that they don’t hew to actuarials the way that private sector insurance does and that directly leads to deficits.

    Interestingly enough – at a lot of locations prone to major damage from floods and hurricanes – the insurance companies have dramatically raised their rates, reduced coverage and in some places, just abandoned the market and refuse to sell it any the state-mandated maximums…

    the insurance companies livelihood depends on actuarial science and they pretty much got it down so that they know what they have to do – to stay in business and to continue to be able to provide market-based insurance.

    The govt, as pointed out by Jim – either does not know or compromises in ways that threaten the solvency of the program.

    I will add that the are some parts of the govt that ARE operated on a sound actuarial basis and Social Security is the one.

    It’s very true that the demographics of baby boomers is going to cause changes but the facts are that for 65 years SS not only stayed solvent but actually generated a surplus which is now referred to as “worthless IOUs” (and they’re not because people do not understand that the ENTIRE FICA revenue stream goes THROUGH the trust fund and within hours it comes back out and gets spent….. thousands of transactions every day …

    and the point is that not only have they remained solvent but they are also required to continuously perform 75-year horizon analysis and that why we know the key dates when they will start to see problems if changes are not made.

    this is a typical and normal practice over it’s 65 history as the look-aheads are done every year and changes in FICA taxes benefits, retirement age have been made over the years to keep it solvent.

    right now OMB has over 30 options to choose from to put SS back on a sustainable basis …

    so my point is that in both retirement insurance and flood insurance, sound actuarials are required and the govt DOES have expertise to do that right – in SOME areas…

  6. It is my understanding that there is NO private flood insurance. If insurors have raised their rates it is not because of flood losses.

    Indeed, they have avoided wind damage costs By blaming the damage on flooding.

    The only way you get flood insurance is by agreeing to the strings. One of them is that if you ever collect, you basically turn over control of your property, concerning how and if you are able to rebuild.

    I predict we will eventually have a flood plain national park as a result.

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