Pro-Con: Is it time for the U.S. to ditch the Federal Flood Insurance Program?
Yes: Faulty program exposed by this year’s storms
Nearly 50 years ago, Congress made big promises when it established the National Flood Insurance Program.
But with this year’s bad hurricane season sending the already indebted program — called NFIP for short — deeper into the red, it’s clear those promises haven’t been kept.
The NFIP has proven an ineffective way to protect U.S. residents from flood losses, and it’s high time to re-evaluate the policy.
To give credit where credit is due, the initial concept of the program made some sense.
When Congress started it in 1968, essentially no private company wrote flood insurance for residential properties. When disaster struck, relief aid was the only way to rebuild homes. The NFIP seemed like a better choice.
As part of the 1968 law, which also established the Department of Housing and Urban Development, communities were encouraged to opt into the program.
In return for letting local citizens buy taxpayer-backed insurance, communities committed to making themselves more flood resistant.
In the early 1970s, Congress moved to require federally supported mortgage lenders to mandate flood insurance for properties in floodplains. The federal government also began to produce flood maps that would let communities know which areas were likely to flood, so they could prevent it.
Over time, the program’s architects hoped, NFIP would pay for itself and maybe even return a small profit to the Treasury.
That hasn’t happened. Before hurricanes Harvey and Irma, NFIP owed the Treasury some $24.6 billion and had no practicable way to pay it back. By the end of 2017, the debt likely will be roughly double.
While the program’s widespread adoption has resulted in most communities forbidding construction in the most obviously foolhardy locations, its pricing policies —overcharging those who face a modest risk and undercharging those with the greatest risk — have had the effect of encouraging building in other flood-prone areas.
As a result, many of those whose homes are less likely to flood don’t bother to insure, while those in higher-risk locations do, resulting in very expensive claims.
Fortunately, good alternatives now exist. The initial case for NFIP was based on several assumptions that no longer hold true: most prominently, that flooding is “uninsurable.”
That has a grain of truth: Unlike car crashes and house fires, floods aren’t independent events. If one home floods, there’s a very good chance that all others in the same area also will flood.
In the days before global “reinsurance” markets, a small insurer that wrote policies in a single state couldn’t effectively spread the risk of flooding; even a nationwide company may have had a hard time.
This made it very difficult for casualty insurers to sell products profitably. Mapping — which enables home buyers and insurers to predict the likelihood of flooding on a given tract of land — also was less reliable in the past.
Today, global reinsurance markets allow insurers to spread flood risk all over the globe. Indeed, the NFIP itself purchased $1 billion worth of private reinsurance, at a cost of just $150 million.
This will reduce the cost of the 2017 storms to taxpayers. Flood mapping, although still challenging, also is far better today than in the 1960s.
The National Flood Insurance Program hasn’t made America safer. While it would be impractical to eliminate the program right away, there is no reason that it can’t be phased out over time.
This is not 1968; today, private flood insurance is available. Businesses and homeowners in the highest-risk areas along the Atlantic coast and Gulf of Mexico might have to pay more, but this would discourage continued overbuilding in these areas.
That would be a blessing, both to taxpayers and those who might be spared what the victims of Harvey and Irma now are going through.
Eli Lehrer is the president of the R Street Institute, a Washington-based free-market public policy think tank, and a research fellow with the Independent Institute in Oakland, Calif. Readers may write him at R Street Institute, 1050 17th St. NW, suite 1150, Washington, D.C., 20036.
No: Program should be expanded, not killed
It’s wrong that millions of Americans can face destitution simply because of where they live.
To ensure every person living on America’s floodplains is covered from financial ruin, the Federal Flood Insurance Program that served people well during hurricanes Harvey and Irma should be improved and expanded.
Because of the risks and uncertainty involved, millions of Americans have only one option for flood insurance: the NFIP, now administered by the Federal Emergency Management Agency.
Those lucky enough to have flood insurance through the program are guaranteed up to $250,000 to cover rebuilding costs and $100,000 to replace personal possessions. For many, however, this won’t be enough to cover the full cost of their losses. That’s just one reason the program needs to be beefed up.
Across the country, only 12 percent of homeowners have flood insurance. More than 80 percent of the homeowners affected by Harvey don’t have such policies.
Those without flood insurance whose homes have been made uninhabitable by flooding can apply for a $33,300 loan to cover rebuilding costs and hotel stays. And low interest loans are available through the Small Business Administration.
But the support made available through FEMA and the NFIB is crucial in such situations, as was shown during the recent storms.
FEMA, for example, froze about $134 million owed to dozens of North Carolina counties for repairs after Hurricane Matthew so those funds could be used for repairs after Harvey and Irma. The agency also spent between $150 million to $200 million per day for disaster relief.
FEMA, reacting quickly, also changed its rules to provide advance payments on flood claims, even before visits by adjusters, and increased the advance payment allowable for policyholders who provided photographs or videos showing flood damage and expenses. The agency also extended the grace period for payment of NFIP policy renewal premiums to 120 days. In addition, the agency sent groups of officials to hard hit areas to guide survivors through the very difficult first steps toward recovery.
All that said, the program and the emergency agency should be given more heft.
It’s not an exaggeration to say 25 million homeowners living in floodplains need this insurance, about five times as many as have it now. Without it, they have no way to rebuild their lives after floods.
The 49-year-old program, which provides about 98 percent of residential flood insurance, is woefully underfunded and already some $25 billion in debt to the Treasury Department. It desperately needs more funding from Congress.
The best way to expand the program is to renew it on a multi-year basis, as a FEMA official told the Senate Committee on Banking, Housing and Urban Affairs earlier this year.
Roy Wright, a FEMA deputy associate administrator, said the program should not only be extended for multiple years but should also “recognize the need to increase flood insurance coverage across the nation.”
While numerous experts and analysts have called for the insurance program to be reformed, Wright cautioned that ultimately the “premium paid for flood insurance must reflect the risk.”
That would mean higher premiums, but they would be worth it — just ask those in Harvey, Irma and Maria’s wake who weren’t insured.
A native of El Paso, Texas, Whitt Flora covered the White House for The Columbus Dispatch and was chief congressional correspondent for Aviation Week & Space Technology magazine. Readers may write him at 319 Shagbark Road, Middle River, MD, 21220.
This story was originally published September 28, 2017 at 3:38 PM with the headline "Pro-Con: Is it time for the U.S. to ditch the Federal Flood Insurance Program?."