In the wake of Hurricane Sandy, many reminisce of 2005's Hurricane Katrina. With at least a dozen East Coast states in a declared state of emergency, many look toward the Obama administration and FEMA for assistance. With whispers of the incalculable amount of damage done to the East Coast, few bring up the debt that FEMA has incurred, much from the FEMA-administered National Flood Insurance Program.
The National Flood Insurance Program (NFIP), with the Flood Disaster Protection Act, has made the purchase of flood insurance mandatory in certain areas. NFIP under-cuts private flood insurance companies by offering a lower, government-subsidized price for flood insurance.
NFIP is around $18 billion in debt, even before the financial effects of Sandy are counted.
Many homeowners don’t realize that flood insurance is not part of the typical homeowners insurance policy and needs to be purchased separately. Those who know may opt not to purchase it because flood insurance can be just as much as homeowners insurance.
The type of flood insurance you purchase doesn't matter to your local insurance agent. Almost all major insurance companies insure through NFIP and are compensated no matter what. This is even better for them since the federal government is paying the claim -- all reward and no risk for the insurance company.
As for the homeowner, cheaper flood insurance is an incentive to get flood insurance. While it is a perfectly rational decision to take advantage of affordable flood insurance, flood insurance is usually associated with areas of flood risk. Homeowners wouldn't move to an area with flood risk if flood insurance wasn't artificially cheap. It’s a government created catch-22.
Many of the people making claims from Sandy may never have had flood damage before, but much of NFIP’s costs come from people whose homes flood year after year. While only 1 percent of the people covered by NFIP fit into this category of repetitive loss properties, they account for about a third of the cost to the program. Since they have no economic incentive to move or modify their homes to be more resistant to damage, many people who live in flood zones simply collect their check year after year and rebuild exactly the same while everyone else pays for it.
There has been some positive movement this year with the NFIP Extension Act, which excludes vacation and second homes from being federally subsidized.
But the underlying problem has not been addressed. Once again, the federal government has unnecessarily gotten involved in something it shouldn't have in the first place, leaving taxpayers with the bill.