Don’t Forget Flood Insurance Reforms

Harvey and Irma are gone, leaving devastation in their wake. Jose is headed away from our east coast, and then there is Maria. These are just the latest crop of significant Atlantic storms. We go through watchful waiting for hurricanes every year. Sometimes it amounts to paranoia and sometimes they really are out to get us. We should stay focused on the task of protecting ourselves from an even bigger cluster of serious hurricanes.

After each significant hurricane, policymakers promise that we’ll align National Flood Insurance Plan (NFIP) premiums with the actuarial risk for coastal properties, threaten to cease reimbursing property owners who rebuild properties that have had repetitive storm damage, or talked about the need for proven to be storm magnets, or talked about requiring rebuilding to standards to will mitigate future storm damage. Coastal properties should be “a lot sturdier and higher up.”

The NFIP offers error-prone rates that are unfair to consumers. Sometimes they intentionally undercharge some coastal homeowners, effectively providing a federal subsidy for risky behavior. In other cases, NFIP premiums are based on erroneous flood risk maps, whereby only 49% of its flood maps are deemed accurate. The rest have not been validated or are various shades of wrong.

At the time of Hurricane Irma, the Congressional Budget Office (CBO) reported that 85% of coastal properties insured by NFIP were subsidized. On the other hand, in areas with the highest risk of flooding, (VE zones), “62 percent of Florida homes, 85 percent of Louisiana homes and 88 percent of Texas homes could see lower premiums from the private market than under the NFIP.”

A Wall Street Journal article offers the cynical view that “influencers” in the Boston to DC corridor tend to own coastal vacation properties and they do not want their flood insurance rates adjusted to reflect the true risk of flooding.

The CBO reports that the NFIP incurs $5.7 billion in annual costs, of which $3.7 billion is from anticipated claims. “Another $1.1 billion goes to private companies who write and service NFIP policies, as well as $200 million on salaries and operating expenses for NFIP and FEMA personnel. Another $700 million is spent on additional expenses, including $200 million each on mitigation-assistance programs, floodplain mapping and management. Separately, the program must spend $300 million annually to service interest on the program’s debt, which stood at $24.6 billion prior to the strike of Hurricane Harvey.”

The net result is an annual NFIP shortfall of $1.4 billion – enough to crowd out most private storm insurers. With such a chronic and well publicized loss, Congress cannot justify allowing NFIP to continue the “habit of subsidizing affluent coastal dwellers.”

We must fix the runaway train that NFIP has become before we sleepwalk into hurricanes that cost us a big part of the $1.255 trillion in NFIP coverage written during 2016. It’s in the consumers’ interest to spread the risk across more insurers and at properly compensatory rates. Getting the private insurers into the flood insurance market is part of that answer.

Alan Daley lives in Florida and writes for the American Consumer Institute.

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