Research & Commentary: Windstorm Expansion of the National Flood Insurance Program

Published April 7, 2009

In an effort to address the concerns of coastal residents and respond to political pressure to subsidize 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, introduced by U.S. Rep. Gene Taylor of Mississippi in early 2007—would expand the National Flood Insurance Program to include windstorm coverage.

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. In its current form, NFIP offers flood insurance to citizens of a community as financial protection against flood losses. In return, the 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. Although NFIP was designed to be self-sustaining, a Congressional report found in 2004 that the program costs taxpayers up to $200 million annually, primarily because some properties experience 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 2007, the U.S. Census Bureau estimated 35.3 million people live in hurricane-prone coastal areas stretching from North Carolina to Texas. Adding windstorm coverage to NFIP would encourage people to ignore important market signals and the real risks of living in the path of danger. Providing wind (hurricane) coverage in coastal areas is often prohibitively expensive for insurers and the insured. Those high prices are an important market signal, reminding prospective and current property owners about the dangers of living in hurricane-prone areas. The market signal of a high property insurance premium is the first line of defense in disaster preparedness, telling property owners to consider the risks of hurricanes.

NFIP already disproportionately favors the wealthy, and extending it to wind coverage would exacerbate that problem. More than 70 percent of coastal land—land that is highly valued in the real estate market—is privately owned. Many taxpayer-funded disaster loans and mitigation and erosion control programs subsidize the properties of wealthier homeowners.

The proposal to extend NFIP is opposed by many groups in the industry and government, including the Insurance Information Institute and Property Casualty Insurers Association of America. They say an expanded NFIP would displace the private market, which already provides windstorm coverage, and create an environment where taxpayers in areas with less risk exposure would subsidize the cost of homeowners living in areas with greater exposure. Representatives from the Federal Emergency Management Agency opposed the original expansion proposal in 2007.

Adding wind coverage to NFIP would serve only to exacerbate its existing problems while adding billions of dollars in new liabilities for taxpayers … all in the midst of an economic downturn.

The following articles address some of these concerns and examine the proposed expansion of NFIP from a free-market perspective.

I.I.I. President: Expansion of National Flood Insurance Program (NFIP) Poses Risks
Robert Hartwig of the Insurance Information Institute describes some of the problems taxpayers and homeowners would face if wind coverage were included as part of NFIP. Includes link to full testimony.

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

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

Ensuring Disaster
Eli Lehrer of the Competitive Enterprise Institute writes about the inherent risks of federal involvement in windstorm coverage, using the deficiencies of the National Flood Insurance Program as an example. The experiences of NFIP provide a good case study.

PCI Makes Case against Adding Federal Windstorm Insurance to the NFIP
This article outlines the Property Casualty Insurers Association of America’s position on the expansion of NFIP, outlining several key deficiencies of the proposal, including the displacement of the private market and high potential cost to taxpayers.

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

Insurance Information Institute Issues Updates: Flood Insurance
These Issue Updates provide background on flood insurance and NFIP, examining several recent developments at both the state and national levels. They also examine national catastrophe fund proposals.

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].