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Government Insurance: Guaranteed to Fail

Few observers were shocked when the Federal Emergency Management Association (FEMA) asked for a nearly $20 billion bailout of its National Flood Insurance Program (NFIP). For years groups and individuals have warned that NFIP was underfunded and increasing its liability each year by not encouraging consumers to move or alter their homes in a way that would limit future losses. The availability of government provided insurance allowed people to continue building in at-risk areas like Florida's coastline. The big problem? Government run insurance providers are not motivated to charge adequate rates, keep costs down, or encourage consumers to alter their homes to prevent further damage. As this USA Today article cites a notable anecdote that, unfortunately, isn't all that uncommon:
In Wilkinson County, Miss., a home has been flooded 34 times since 1978.

Extraordinary as the damage may be, even more extraordinary is that an insurer has paid claims every time, required no flood proofing, never raised premiums after a claim and vowed to continue insuring the house. Forever.

The home's value is $69,900. Yet the total insurance payments are nearly 10 times that: $663,000.

It's no surprise that the insurer faces huge financial problems.

The insurer? The federal government.

Government run programs fail to send the appropriate "safety" signals about consumer behavior, but their presence in the market also makes it more difficult for private insurance companies to compete. In Florida, for example, the state-run wind insurer (Citizens Insurance Corp.) was meant as a "last resort" for consumers who could not find coverage anywhere in the market. Eventually, the company charged rates that were so low that private insurance companies could not compete and chose to leave the state, resulting in more people becoming reliant on the government-backed programs. For these reasons, CEI along with a diverse coalition of consumer, taxpayer, and environmental groups vehemently opposed proposals to expand the National Flood Insurance Program to include other perils, like wind. Back in 2008, former CEI Senior Fellow Eli Lehrer had this to say about plans to expand the National Flood Insurance Program:
"...America's most important flood control program-the none-too-creatively named National Flood Insurance Program (NFIP)- faces serious troubles. In its current state, it drains the Treasury, damages the environment, and encourages unwise development. At minimum, it needs a restructuring that puts environmental and fiscal responsibility ahead of the questionable short-term desire of some for lower insurance rates in flood-prone areas.
Given that it sells insurance for less than any private company would, the program is a fiscal disaster. Although it theoretically, "borrows" money from the Treasury rather than actually raiding it, its fiscal state doesnt really make it possible for NFIP to pay back its debts. Right now, it owes the Treasury almost $18 billion and has no practical way to pay it back." Not only was this fiscal head-on-collision ignored by many in congress, some wanted to increase the liability it owed by adding wind coverage-that is, allowing the federal government to cover hurricane damage. With states like Florida getting hit hard nearly every season the potential liability would be enormous.
"Findings by research firm Towers Perrin predicted losses up to $200 billion if a federal program replaces private sector catastrophic wind insurance."
If Americans want to avoid these fiscal catastrophes in the future, we must get the government out of the business of private enterprise and allow profit-motivated companies offer rates that actually reflect the risk of certain behavior. If consumers don't like the cost of insurance for a potential home on the beach then they might consider buying a home far away from the dangers of hurricane winds, rather than relying on US taxpayers to bail them out after their home is damaged year after year.