Federal Flood Insurance Promotes Poor Building Decisions

Published November 21, 2016

Following the recent flooding in Louisiana and along the southeastern U.S. coast in the aftermath of Hurricane Matthew, federal and state disaster declarations are shining renewed light on the U.S. National Flood Insurance Program (NFIP).

NFIP holds policies for more than five million homes across the United States and currently owes the U.S. Treasury approximately $23 billion.

One reason for NFIP’s debt is it insures homes in flood-prone areas that have made repeated claims for flood damage. According to the National Resources Defense Council, more than 2,100 U.S. properties enrolled in the program have flooded and been rebuilt more than 10 times each since 1978, and more than 30,000 properties in the program have flooded multiple times over the years.

These homes, known as “severe repetitive loss properties,” make up just 0.6 percent of federal flood insurance policies, but they account for 10.6 percent of the program’s claims, receiving more than $5.5 billion in payments since 1978.

Subsidies Spur Risky Choices

Federal flood insurance encourages people to live in risky flood-prone places, says Chris Edwards, director of tax policy studies at the Cato Institute and editor of DownsizingGovernment.org.

“The problem stems from a basic principle: If the government subsidizes something, people do more of it,” Edwards said. “They subsidize flood insurance, and as a result, people who don’t have to bear the costs of their poor decisions are induced to live in more dangerous places.

Edwards says federal intervention in flood insurance markets is unnecessary and counterproductive.

“There is no reason for federal intervention,” said Edwards. “A private, unsubsidized flood insurance market could develop if the government got out of the way. Insurance may not be available in the most risky locations, but this would be a good market signal warning people they shouldn’t be living in those locations.”

Edwards also recommends the federal government repeal other subsidies and programs encouraging people to live too close to flooding rivers and seacoasts, including the Army Corps of Engineers’ flood control and beach replenishment programs.

“In general, policies and programs related to water resources and flooding ought to be devolved to state governments,” Edwards said.

Calls for Privatization

Eli Lehrer, president of the R Street Institute, says NFIP encourages people to make poor siting decisions for their homes and businesses, costing taxpayers billions of dollars.

“By encouraging people to live where they shouldn’t, the NFIP costs taxpayers quite a bit of money,” Lehrer said. “In the long term, we could protect lives, property, and the environment better by transitioning it to the private sector. The single best thing we could do is end the program for most people and let the private sector take over and then focus public-sector resources on mitigation.”

Kenneth Artz ([email protected]) writes from Dallas, Texas.