Since the first comprehensive flood control legislation went into effect the early 20th century, America’s federal government has fought a never-ending battle to control floods. For forty years—fifty-one if one counts a stillborn Eisenhower administration effort— the federal government has run a program intended to provide Americans with insurance against flood.
Today, 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 floodprone areas.
Some background first: As it has existed since the 1970s, NFIP is a governmentadministered, privately run program that relies on federal-state partnerships. Before individuals can buy flood insurance, the places they live must opt in to NFIP by adopting zoning codes that, at least in theory, discourage construction in flood-prone areas. In communities that participate— nearly all have since the early 1980s— individuals can buy flood insurance from almost any company that sells homeowners’ insurance.
The setting of rates that insurers charge and the actual liability for claims, however, lies with the government. When a homeowner makes a claim, NFIP, not the insurer, pays out nearly all of the claim and processes it through the insurer. In theory, NFIP charges “actuarially adequate” rates that at least allow it to break even on properties built or overhauled after the program began. (Older properties are grandfathered in.) But the program has enormous negative effects—particularly on the environment. Quite simply, it’s underpriced and implicitly subsidized. Thus, it encourages building in places—many of them areas of natural beauty or importance to wildlife—that private builders and insurers would never develop absent flood insurance.
The National Wildlife Federation, for example, has found that NFIP rebuilds thousands of properties time and again, despite overwhelming evidence that floods prove a serious threat to them. The program’s technical definitions of “adequacy,” furthermore, almost always prove less rigorous than those the private sector (and some state governments) use. As a result, the rates the program charges are less than those that the risk of flooding really requires. In other words, through the program the federal government indirectly subsidizes lots of development in areas near water.
DRAINING THE TREASURY
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 doesn’treally 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. (Earlier this year, the Senate voted to forgive the debt.)
Finally, although a program to modernize them has gotten underway, the maps that the program uses to determine rates have a variety of serious flaws. As a result, many properties built in “safe” places and charged reasonably low rates aren’t actually safe at all.
Given the enormous problems the program faces, it’s worth treating the proposals for expanding it with enormous skepticism. The House of Representatives has actually voted to begin offering wind coverage—mostly against hurricane winds—through NFIP.
Hundreds of private companies already offer wind insurance and doing this would likely encourage even more unwise construction while, again, doing almost nothing to protect the environment. Wisely, Republicans for Environmental Protection has joined withdozens of other free market, environmental, and taxpayer groups to oppose it.
As messy and as environmentally destructive as the program has become, simply getting the government out of the way and letting the free market run flood insurance (the ideal long-term solution) isn’t a viable option in the short term.
A few private companies do write some flood coverage for the very rich—whose properties far exceed the flood program’s maximum— but even homes that sell for a million dollars are often generally insured through the program. Quite simply, insurance companies never figured out how to make money writing flood insurance. In fact, although insurance companies are loathe to admit it in public, homeowners’ insurance in general has never really produced profits. Over any given twenty-year period, insurers will pay out in claims everything they take in premiums. (They make money off homeowners’ insurance by investing premiums dollars in-between claims and selling other products to those who buy it.)
Writing flood insurance requires complex mapping that even the federal government hasn’t done properly. State bureaucrats around the country also administer regulatory regimes and even sell insurance themselves in an effort to keep rates down even in places where high insurance costs rates should be a sign not to build. Florida’s state government, in fact, runs the largest homeowners’ insurance program in the state.
Transforming flood insurance from a program that encourages unwise development into one that’s at least neutral for the environment— and consistent with conservative principles— requires at least five steps: a firm commitment that the program won’t rebuild properties more than twice, a dedication to preserving nature’s own flood barriers, a revamp of standards for building codes, and measures to encourage states to take risk into account in setting insurance rates.
First, the most obvious flaw in the program is its willingness to rebuild properties time and again. Both House and Senate have passed “two strikes and you’re on your own” laws that drop properties from the program after they’ve been rebuilt twice. This is simply common sense and, in the long term, can save a great deal of money, protect the environment, and make communities safer.
In addition, the behind-schedule, underfunded map modernization process needs to get full funding so the rates can become more accurate. In the medium term, Congress needs to look for ways that can encourage private companies to get into the flood-mapping business. No matter how good the contractors producing the maps are, any flood map contains a series of educated guesses. It’s better to have more than one set of baseline data and let trial and error figure out what works and what doesn’t.
Next, the nation’s overall plans for flood control should consider floods an inevitable, natural occurrence rather than an enemy. Natural wetlands reduce the size of posthurricane storm surges and soak up flood waters before they hit cities and towns. Efforts to preserve them, particularly by limiting all government subsidies for efforts that pave and drain them, deserve top priority.
The nation’s coastal infrastructure also needs a full-scale review: the marginal economic benefits of certain shipping channels and poorly placed breakwaters are far outweighed by the enormous economic cost they can impose when they serve to increase flooding. Redesigning or eliminating them could make the nation much safer.
Finally, the federal government has a role to play in moving states towards environmentally conscious risk-based rates for insurance. If insurers and NFIP were allowed to take risk into account in every decision, the resulting regime would automatically protect the environment. The riskiest areas, on balance, are those closest to water and those most important to wildlife. The most promising option on the table right now involves a federal regime that would give insurers the choice of federal regulation rather than state regulation and, in so doing, provide an alternative to burdensome state regulatory regimes.
As it stands, NFIP wastes money and encourages unwise development. It’s impossible to eliminate in the short term, but conservative principles suggest a simple solution: start moving government out of the way.
Eli Lehrer is a senior fellow at the Competitive Enterprise Institute, where he directs CEI’s studies of insurance and credit markets. Prior to joining CEI, Lehrer worked as speechwriter to United States Senate Majority Leader Bill Frist (R-TN).
Lehrer previously worked as a manager in the Unisys Corporation’s Homeland Security Practice, Senior Editor of The American Enterprise magazine, and as a fellow for the Heritage Foundation. He has spoken at Yale and George Washington Universities.
He holds a B.A. from Cornell University and a M.A. from The Johns Hopkins University, where his Master’s thesis focused on the Federal Emergency Management Agency and Flood Insurance.
His work has appeared in the New York Times, Washington Post, USA Today, Washington Times, Weekly Standard, National Review, The Public Interest, Salon.com, and dozens of other publications. Lehrer lives in Oak Hill, Virginia with his wife, Kari, and son, Andrew.