For most types of natural disasters in the United States, private homeowner’s insurance is available. Wind damage, hail, fire, falling trees, and everything else that can happen to a house. Ther is one exception to this general rule: Flooding.
Supporters of the National Flood Insurance Program claim it exists because private insurance can’t or won’t cover flooding. Economists note that such reasoning has the cause and effect exactly backwards.
NFIP provides highly subsidized insurance coverage for floods. Because the premiums it charges are too low, the program runs a massive deficit that is covered by Congress out of general taxation. In effect, this makes it cheaper than it otherwise would be to build in high-risk flood plains. Because it’s subsidized, more such construction takes place than otherwise would.
Free-market advocates have long decried this arrangement as irrational and destructive, causing flood disasters to be worse than they otherwise would. Environmentalist and conservationists have joined that criticism, noting that the NFIP functions as an encouragement to fill in and build over wetlands.
The program is up for renewal in Congress soon. The aftermath of Hurricane Harvey has spurred renewed interest in restructuring the program to raise NFIP premiums to an actuarially sound level.
Against this push for reforms, however, stands a typical coalition of liberal Democrats and otherwise-conservative Republicans who happen to be from states and districts that benefit the most from this taxpayer largesse.
It is easy for politicians to grandstand, particularly in the aftermath of a major disaster, about how they will dole out support from the federal treasury. While understandably tempting, the long-term effect only makes such disasters worse.
In the long run, Congress should move toward phasing-out the NFIP program. In the meantime, it should raise the cost of NFIP coverage so that it pays for itself and is not funded out of general taxation revenues.
(Flooded homes are shown near Lake Houston following Hurricane Harvey on August 30, 2017, in Houston, Texas. The city of Houston is still experiencing severe flooding in some areas due to the accumulation of historic levels of rainfall, though the storm has moved to the north and east. Photo by Win McNamee/Getty Images.)