National Flood Insurance

Published July 15, 2008

The recent floods in the Midwest have devastated homes across seven states, evoking memories of the last devastating flood cycle of 1993. Floods have a profound effect on the communities they hit, inflicting millions of dollars of property damage and damaging their economy for years afterwards. While it is not possible to predict the occurrence of large-scale floods, it is possible to prepare for their eventuality.

The National Flood Insurance Program (NFIP) is the United States government’s flood insurance and mitigation system, designed to reduce the cost of natural flood disasters and promote mitigation efforts in flood-prone areas. NFIP is negotiated as an agreement between individual communities and the federal government. The program offers flood insurance to citizens of a community as financial protection against flood losses. In return, the applicant community must agree to adopt and enforce a flood plain management ordinance to reduce future flood risks. NFIP currently covers around 4.5 million homes in more than 20,000 communities.

The 40-year-old NFIP has not lived up to expectations. While originally designed to be self-sustaining, a Congressional report found in 2004 that NFIP cost taxpayers up to $200 million annually through properties with repetitive losses. According to the National Center for Policy Analysis, since 1984 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.

In addition to the inflating costs of the program, critics of NFIP say the flood mitigation program is not accomplishing its intended mitigation goals and is instead encouraging new construction in flood-prone and environmentally sensitive areas. The number of homes built in flood-prone areas has increased over the past 10 years. Flood damage costs have increased by almost 3.4 billion since NFIP was launched in 1968.

The Federal Emergency Management Agency (FEMA) issued 1.3 million applications for federal disaster aid in 2004, a number higher then any previous comparable time period. According to 2000 data from the Census Bureau, more than 50 percent of Americans live within 50 miles of a coast. The Census Bureau predicts these numbers will increase to around 75 percent by 2025.

NFIP is a program that disproportionally favors the wealthy. More than 70 percent of coastal land — land that is 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 flood plain properties of wealthier homeowners.

The following articles address some of these concerns and examine the national flood insurance debate from a free-market perspective.

Subsidizing Disaster
Christy Black of the National Center for Policy Analysis examines the National Flood Insurance Program (NFIP) and danger of subsidizing home construction in flood-prone areas.

Watery Marauders: How the Federal Government Retarded the Development of Private Flood Insurance
Eli Lehrer of The Heartland Institute and Competitive Enterprise Institutes examines the development of NFIP and its negative effects on the growth of private flood insurers.

Moral Hazard in Action: Who Insures Against Floods and Why?
John Hood of Consumer’s Research examines how NFIP can skew the perception of flood risk, inducing homeowners to build in flood-prone areas, with disastrous results.

FEMA’s Unnatural Disasters: Is Katrina the beginning of a trend?
Ronald Bailey of Reason comments on the role of NFIP in the aftermath of Hurricane Katrina, criticizing the subsidization of homebuilding in historically flood-prone areas.

Confessions of a Welfare Queen: How rich bastards like me rip off taxpayers for millions of dollars
John Stossel critically comments on NFIP and its subsidization of coastal homebuilding in risky areas, a housing market dominated by the wealthy. Stossel portrays NFIP as a gift to the rich and its recipients as wealthy “welfare queens.”

Federal Flood Insurance: The Repetitive Loss Problem
This report, written by the Congressional Research Office, outlines the evolution of NFIP and examines the repetitive loss problem of the program, the primary cause of its costs overruns.

Repeat Claims Strain Federal Flood Insurance: Program Often Funds Risky Rebuilding
Gilbert Gaul of the Washington Post examines NFIP’s repetitive loss problems and subsidization of risky rebuilding of homes in flood-prone areas inland and on the coasts.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and PolicyBot, Heartland’s free online research database.

If you have any questions about this issue or The Heartland Institute, you may contact Legislative Specialist Matthew Glans at 312/377-4000 or [email protected].