Watery Marauders

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This paper describes how America’s National Flood Insurance Program came into existence and seeks to answer the question of why private flood insurance never developed in the United States on a significant scale. It consists of three sections.

The first section attempts to provide a brief theoretical framework for thinking about flood insurance. It describes what flood insurance does and presents a theory as to how it ought to work.

The second section provides the early history of the flood insurance program. It outlines how the federal government first took on the responsibility of protecting the nation from flooding and how Congress failed in its first effort to offer federal flood insurance.

The third section explains how America got the system of flood insurance that it has today. It explains how the Tennessee Valley Authority, U.S. Geological Survey, and a variety of local governments gathered enough risk data to make federal flood insurance palatable to Congress, how Congress implemented a program, and then stripped it of its risk-based character.

The paper reaches a simple conclusion: Flood insurance, in its current form, did not emerge as a result of market failure. While some factors, including the role of state regulation, remain undetermined, the current situation represents an example of what economists call “government failure.”

The federal government built levees that altered America’s natural landscape and thus increased flooding, discouraged market entry by failing to repeal a calamitously impractical flood insurance law, supported mapping and zoning efforts that exacerbated flooding problems, and created a flood insurance program that priced policies well below market levels. Flood insurance exists as it does because political institutions sought to “correct” a perceived market failure and thereby made the emergence of private insurance unlikely, if not impossible.