National Flood Insurance Program Failures Raise Concerns

Published February 12, 2010

Funding for the National Flood Insurance Program could dry up this spring without Congressional reauthorization. Program critics say this might not be a bad development, as the program encourages development of excessively high-risk properties.

Shortly before the program was scheduled to expire in October 2009, Congress extended it for seven additional months. Lawmakers are currently considering measures reauthorizing the program for an additional five years, in bill HR 3121.

Mark Calabria, director of Financial Regulation Studies at the Cato Institute, argues the NFIP, initially launched more than 40 years ago as a temporary solution to insure highly exposed homes, has devolved into a subsidy and has resulted in the private insurance market being undercut by the taxpayer-backed flood program.

Before joining Cato in 2009, Calabria spent six years as a member of the senior professional staff of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. During his tenure he helped work on legislation addressing some of the systemic problems within the NFIP.

Repetitive Losses
One of Calabria’s chief concerns is the issue of repetitive loss. Although NFIP was designed to be self-sustaining, a Congressional report in 2004 found the program costs taxpayers up to $200 million annually, primarily because some properties repeatedly experience flood losses.

According to the National Center for Policy Analysis, since 1984 the NFIP has paid out nearly $1 billion for at least 10,000 properties that have experienced two or more losses, with cumulative claims often exceeding the value of the property.

Calabria said he believes the NFIP is not accomplishing its intended mitigation goals and “is instead encouraging new construction” in many flood-prone and environmentally sensitive areas.

He notes the number of homes built in flood-prone areas has increased over the past 10 years, and more than 70 percent of coastal land—highly valued in the real estate market—is privately owned. This means many of the disaster loans and mitigation and erosion control programs subsidize the coastal or floodplain properties of wealthier homeowners, Calabria says.

Expansion Proposals
Efforts to expand the scope of the NFIP have become a contentious point of debate in recent years. In an effort to address the concerns of coastal residents and respond to political pressure to mitigate the risk posed by hurricanes, the national government is considering proposals to expand its role in coastal insurance.

One such proposal—the Multiple Peril Insurance Act, first introduced by U.S. Rep. Gene Taylor (D-MS) in early 2007—would expand the NFIP to include windstorm coverage. Calabria considers this a bad idea, saying the addition of wind coverage to NFIP would increase the problems of an already bankrupt system while adding billions of dollars in new potential liabilities for taxpayers.

While Calabria believes the NFIP has made some progress in certain areas, he says the system has not achieved the majority of its stated goals.

Flood Risk Disclosure
Some reforms recommended by Calabria include a phase-out of subsidies for both repetitive loss properties and vacation homes, along with disclosure of flood risk at the time of a new home purchase.

“Foreknowledge of the true risk posed by flooding could promote increased personal home mitigation efforts and lower claims down the road,” Calabria said.

Although accurate pricing of flood risk by the private market may have not been possible in 1968, Calabria believes the market “is now more capable of pricing flood risk.”

Matthew Glans ([email protected]) is a legislative specialist in financial services for The Heartland Institute.