With the national spotlight on flooding caused by hurricanes Harvey and Irma, the National Flood Insurance Program (NFIP) has come under scrutiny. The federal program primarily focuses on offering flood insurance coverage and reducing the impact of flood damage.
The NFIP was established in 1968 to counteract a market failure on the part of private companies, which failed to provide coverage because of the high costs. The program utilizes flood maps for over 20,000 communities to assess risk areas and to establish insurance rates. The NFIP provides the most amount of coverage to Florida with 1.8 million active insurance policies.
According to the Heritage Foundation, the NFIP is currently $25 billion in debt to the U.S. Treasury. The program also charges higher premiums to those in lower-risk flooding areas, leaving many questioning the efficiency of the NFIP as a whole. In the case of Hurricane Irma, the total cost of damage to Florida is expected to range from $20 to $50 billion.
Jennifer Wriggins, professor of law at the University of Maine, notes that one of the fundamental flaws in the NFIP approach to insurance coverage is that:
“In providing deeply discounted rates on the oldest and riskiest properties, Congress discouraged replacing and mitigating these properties. In fact, Congress’s policies unfortunately encouraged homeowners to retain these properties. After floods, flood insurance benefits were often used to repair existing homes rather than replace them with new, more flood-resistant homes. Thus, the number of older, risky homes remained higher than it would be if people actually had to pay the full cost of flood insurance on those homes.”
These subsidies in turn encourage further infrastructure development in high-risk areas, which increases liability. This development is a classic example of moral hazard, which describes the counter-intuitive nature of incentivizing negative behavior on the behalf of consumers via well-meaning policy.
The NFIP fails to accurately price insurance premiums for the properties they insure. Cato Institute policy analysts Ike Brannon and Ari Blask, however, argue that private flood insurers are able to price premiums in order to reflect flood risk instead of subsidizing high-risk areas. In fact, homeowners who that receive subsidies are often affluent citizens owning who own property in coastal areas. Brannon and Blask found that 12 percent of subsidized properties along the coast were worth more than $1 million and 40 percent worth over $500,000.
Yet, according to the Federal Energy Management Agency (FEMA) one of NFIP’s goals is to provide affordable flood insurance. However, homeowners in low-risk flood areas do not receive this benefit. This is due to the fact that by artificially lowering the price of high-risk properties, low-risk property holders are left subsidizing the cost of flood insurance for higher-risk flood zones.
President Trump temporarily reauthorized the NFIP to address the massive flooding experienced after Hurricane Harvey and anticipated damage from Irma. In three months, Congress will convene to discuss the fate of the NFIP. Its decision will surely impact the everyday lives of Florida homeowners.