Reforming the National Flood Insurance Program after 35 Years of Failure

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Three-and-a-half decades after it emerged in its modern form, the National Flood Insurance Program (NFIP) remains deeply troubled. Although modestly successful in improving the quality of land use planning in the United States—at least relative to what came before—the program has enormous weaknesses. In particular, it has cost taxpayers billions of dollars despite promises that it would sustain itself, encouraged some development in environmentally sensitive flood plain areas that would not have occurred absent the program, and has impeded the development of superior, private sector models to deal with flood risk.

Legislation recently approved by the House of Representatives and the Senate would resolve some of the program’s most obvious absurdities and reduce its liabilities slightly, but will not solve its fundamental, underlying problems. Rather than continued “baby steps,” NFIP needs drastic reform. This paper considers a variety of incremental steps and argues that four major steps hold promise for moving beyond the program.

Land buy-outs. In certain cases, government, private industry, or a combination of the two might buy land currently occupied by NFIP-insured properties and convert it to more flood-resistant uses—for example, golf courses, public parks, and other public areas. Although attractive for some parcels of land, and an important component of any “exit strategy” for NFIP, land buyouts cannot, alone, solve the program’s problems.

Partial Privatization of Flood Mapping. Rather than stick with NFIP’s “one size fits all” mapping system—an approach that guarantees that maps will have flaws—the government should move towards a private mapping system by allowing insurers to base flood insurance rates on any approved map they can chart. Insurers could devise different sets of maps and set rates based on them.

Sale of the Program’s Assets. A large portion of the National Flood Insurance Program’s policies have some value on the private market. Divided up into portfolios, many could find buyers at auction. Such a sale would reduce the government’s role in flood insurance provision by a good deal, but would deprive the government of a revenue source to subsidize many of its worst risks.

Tax Credits and Program Termination. Following a sale of the bulk of the NFIP’s policies, a tax credit or grant program could serve to phase out NFIP altogether. People currently within the NFIP would either receive a one-time grant correlated to the decline in the value of their property resulting from the NFIP’s termination or more modest ongoing but time-limited subsidies. Thus, the government’s liability for the program would end.

The National Flood Insurance Program is broken and needs serious change. In the long term, it needs to go.