The National Flood Insurance Program (NFIP) is in desperate need of reform to maintain its solvency, but a recent proposal in the Senate would only make the problem worse.
It’s not hard to identify the source of the NFIP’s financial difficulties. The program simply doesn’t charge premium rates that fully reflect risks. That, coupled with the perverse incentives it provides homeowners to build in flood-prone areas, has caused a downward financial spiral, and recent floods by storm have only made matters worse.
Recent analysis by the Congressional Budget Office revealed that NFIP has an annual shortfall of $1.4 billion. Since 2005, the NFIP has had to borrow billions of dollars from the U.S. Treasury to pay claims from major natural disasters. Earlier this year, the Federal Emergency Management Agency (FEMA) — the agency that oversees NFIP — had accumulated debt in excess of $20 billion. In short, the NFIP is hemorrhaging cash and taxpayers are on the hook to cover its financial losses.
A significant portion of premiums with NFIP protection receive large subsidies. According to the General Accountability Office (GAO), 22 percent of homes with an NFIP policy pay premiums that are so subsidized that they cover only 40 to 45 percent of the cost of covering the full risk of flood damage to the properties — putting more than half the cost on the shoulders of federal taxpayers.
You might think that these subsidized policies are targeted to low-income homeowners in need of financial assistance, but the GAO reports that most of the subsidies go to homes with the highest values, meaning that the program is giving handouts to the wealthiest homeowners at the expense of everyone else.
A 2012 law designed to address some of these glaring flaws — and match premiums to real flood risks — was largely dismantled in 2014.
Despite the growing chorus of voices, including the NFIP itself, urging lawmakers to encourage more private sector involvement in flood insurance, Congress has been unable to reach consensus about how to move forward.
Allowing private insurers to enter the flood protection market would introduce new competition and give consumers more options to shop for favorable rates and policies that suit their needs, but efforts to pass such legislation have stalled. The reality is this — successful privatization of the NFIP must be based on risk-based premium adjustments and the end of perverse incentives that encourage homeowners to build and repetitively rebuild in flood-prone areas without facing the financial consequences of their choices.
Unfortunately, a recent “compromise” proposal from Senators Cassidy (R-Louisiana) and Menendez (D-New Jersey) would only exacerbate the problem. Their central idea is to require private insurers to pay a fee to the NFIP for every private policy in flood-prone areas that is not subsidized — the assumption being that unsubsidized policies are lower risk and thus more profitable.
The Cassidy/Menendez plan is an attempt to charge private insurers for cherry-picking profitable policyholders. But this wouldn’t be possible if premiums truly reflected risk. The Cassidy/Menendez plan merely perpetuates the irrational pricing scheme that has caused so much damage to the NFIP already.
Congress should reject the Cassidy/Menendez plan and seek real solutions that put the NFIP on the path to financial sustainability, while allowing the private sector to offer lowering rates and broader choices for the hundreds of thousands of American trapped in this dysfunctional program.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org. This article ran in the Daily Caller on October 4, 2018.