Should We Privatize Flood Insurance?


Should We Privatize Flood Insurance?

By: Adam M. Matheny

The National Flood Insurance Program

Hurricane Michael swept in and left a massive path of devastation in its wake. It also created another problem far beyond the destruction and loss of life. The one program put in place by the government to protect those suffering loss due to flooding was struggling under a massive financial crisis.

The reason the NFIP is in such dire financial straits, is quite simply that the program does not charge those participating in the program enough to cover their losses in the event of a flood. Meaning that even in an average year they don’t take enough to cover losses, let alone in a bad year. Congress says the NFIP is bleeding money at the rate of $1.4 billion every year.

In years where massive natural disasters strike such as hurricanes, the program has had to turn the U.S. Treasury for loans to ensure they can cover the cost of losses. Even after Congress forgave $16 billion worth of debt, the NFIP is still $20.5 billion in debt. Unless something is done to change things, the situation is only going to worsen.

Damage Mitigation

Any changes Congress enact with regard to the NFIP must include a strong push towards damage mitigation and finding ways to reduce the damage caused by flooding. This alone would be enough to cut back significantly on losses and make huge strides towards stabilizing NFIP’s financial situation.

Currently, the NFIP encourages people to remain in place and use their payout to rebuild their home or business in the exact same place. Time and again their homes are subjected to flood damage, and the program pays out. Consider this, one home in Mississippi valued at $70K filed a total of 34 claims during the period 1978 through 2010. The claims were paid each time and added up to $663,000. This is almost ten times the market value of the home, but the bills just kept being paid.

This is only one example of such a situation, the Government Accounting Office (GAO) found that one percent of all homes insured by the NFIP accounted for almost 30 percent of all claims filed. The report also noted that from 1997 to 2011, the number of repeat claims increased by a massive 73 percent.

Government Subsidies

Many of those insured under the NFIP also receive significant insurance subsidies that affect the incentives the homeowner receives, causing higher losses. The GAO reports that “22 percent of homes with an NFIP policy pay premiums that reflect only 40 percent to 45 percent of the cost of covering the full risk of flood damage”. This leaves the taxpayer to cover the rest of what amounts to billions of subsidy dollars.

If this isn’t bad enough, most of these subsidy dollars end up going to the wealthy where they are not needed rather than those in the low-income bracket where they are needed the most. Think of this as “welfare for the rich.”

What this does, is continue to drive more development in flood-prone areas, which leads to more risk, higher losses, and increased costs for everyone. Taxpayers will be bearing the burden of the costs of these developments and the liability they pose for decades to come.

Moving Flood To The Private Market

To help expand coverage, restore financial stability to the NFIP, Congress needs to allow the private insurance sector to strengthen its role in the flood protection market. Doing so would provide for a broader range of coverage options, allow rates to be set that reflect actual risk, and help bring costs down. At the same time doing so would help lift the burden of covering losses from the shoulders of the average taxpayer. Even the NFIP agrees that the private insurance sector needs to become involved. It seems pretty obvious that Congress needs to make this happen.

Partner With The Best

While the NFIP is still insuring the lion share of the flood insurance market, there are currently many private flood insurance carriers. Flow Insurance Services knows private flood, and we know it well. Place your trust in us and let us help you to write more business. When it comes to growing your business, things can be challenging. Embrace the opportunity of private flood insurance!

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