Should the Government Subsidize Flood Insurance?

The National Flood Insurance Program (NFIP) provides insurance to homeowners in flood prone areas. Unintentionally, however, the program has encouraged home building in flood-prone, environmentally sensitive areas, at great cost to American taxpayers.

The NFIP, now under the direction of the Federal Emergency Management Agency (FEMA), was created in 1968 to provide flood insurance for homeowners. Private insurers would not provide flood insurance because they would not be able to diversify the losses, according to Jim Hilliard, assistant professor of Risk Management and Insurance at the Terry College of Business at the University of Georgia, in an interview with The Christian Post.

Insurers can provide coverage for something like a fire because it is unlikely that many homes would be affected by fire damage in a given year. Floods, however, affect entire neighborhoods, so insurance companies would be unable to cover the costs of natural disasters as catastrophic as floods.

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The federal government, on the other hand, has the resources to compensate losses due to floods. Homeowners who take part in the NFIP buy flood insurance from a private insurer, but the federal government, if flood damage occurs, covers the loss.

The premiums are low, “as low as $129 per year,” the NFIP website advertises. The revenue generated by the premiums do not cover all the costs of flood damage for those in the program, so the federal government has to pay the difference.

An unintended consequence of the NFIP, according to Hilliard, is that the program encourages development in flood prone areas. So, when a flood does occur, there is more damage, and American taxpayers end up paying much of the cost.

The additional costs are not limited, however, to covering the costs of housing damage covered by flood insurance. There are also the additional costs associated with evacuation and rescue efforts that come with having more housing communities built in flood-prone areas.

Many of the flood-prone areas are high value properties, near rivers and beaches. The NFIP is often, therefore, a subsidy for the wealthy.

There is also an environmental cost to the NFIP. Much of the development in flood-prone areas is in environmentally sensitive areas. For this reason, an interesting coalition of liberal, conservative and libertarian groups oppose the NFIP.

The “Green Scissors” coalition proposes doing away with federal programs that, as an unintended consequence, harm the environment. The coalition includes Friends of the Earth (a liberal environmental group), Public Citizen (a liberal government watchdog organization), Taxpayers for Common Sense (a fiscally conservative organization), and the Heartland Institute (a libertarian think tank). In addition to the NFIP, the “Green Scissors” coalition proposes doing away with ethanol subsidies, energy subsidies, and crop insurance.

One proponent of continuing the NFIP, on the other hand, is the National Association of Realtors (NAR), which represents homebuilders. “As the leading advocate for homeownership and housing issues, NAR believes that the NFIP is essential to a properly functioning real estate market, ensuring access to affordable flood insurance for millions of homeowners,” Ron Phipps, president of the NAR, said in a Friday press release.

Suzy Khimm, writing for The Washington Post's “Wonkbook” blog, also brought attention recently to the issue of taxpayer subsidies for flood-prone homes. “As of March 2011, the NFIP owes $17.8 billion, and Irene will only add to the costs, particularly as New York and New Jersey have heavy concentrations of federal flood protection,” Khimm reports.

Rep. Ron Paul (R-Texas), who is running for president, also criticized FEMA's flood insurance program in an interview on Fox News Sunday. “FEMA creates many of our problems because they sell the insurance.... So, we pay people to build on beaches and then you have to go and rescue them. It's so far removed from the market and the understanding of what insurance should be about. Insurance should measure risk. It shouldn't be a bailout program endlessly and encourage people to make mistakes and that is what we continuously do in flood prone areas,” Paul said.

The NFIP will likely undergo more scrutiny as Congress has, this year, been exercising more fiscal restraint. House Majority Leader Eric Cantor (R-Va.) has said that any additional costs associated with Hurricane Irene, or last weeks earthquake in Virginia, should be offset with spending cuts from other parts of the federal budget.

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