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Losses associated with Hurricane Sandy's arrival on the shore's of the Northeast coast Monday will exacerbate the fiscal problems confronting the National Flood Insurance Program. This was a program crying out for reform even before the mega-storm hit. The federal insurance program is supposed to be self-sufficient, but is instead heavily subsidized by taxpayers. Rather than reducing development in flood-prone areas, it has encouraged it.
With ocean waters rising and the number of severe storms on the increase, causing more inland river and coastal flooding, it is long past time for Congress to take a serious look at how the NFIP operates. But the best reforms will not prove popular and will require political courage, always difficult to find in Washington.
When created in 1968 the intent of the program was to fill an insurance gap for property owners in flood-prone areas. Because of the massive losses flooding can cause, private insurers avoided policies covering flood damage. County and local governments participating in the program were required to enact zoning and building rules to reduce construction in flood-prone areas and require better construction where it could take place. Homes destroyed by floods were not to be rebuilt in zones rated for a greater chance of flooding than once in every 100 years.
But through amendments and policy decisions the program has not worked as intended. Because of the protection it provides, the program has encouraged construction in some flood-prone zones that would not happen absent the insurance protection. The program continues to provide subsidies for properties that existed before their communities joined the program, roughly one-in-four properties. The Government Accountability Office estimates that some premiums are only 35 percent to 40 percent of what they would be without subsidies, costing the program $1.3 billion in annual revenues.
Never realized was the goal that construction gradually cease in vulnerable areas. Instead the program has paid to have some homes rebuilt multiple times. In 2010 USA Today documented a home in Wilkinson County, Miss. that had been flooded 34 times since 1978. The federal program paid the claims every time, totaling $663,000 on a property with a $70,000 value.
Every politician, it seems, wants to visit a flood disaster area and promise to rebuild. None, it appears, wants to point out that rebuilding may make no sense.
Given that owners of waterfront properties facing the greatest risk of flooding are generally far wealthier than the country as a whole, a perverse redistribution of wealth takes place. Taxpayers of average means must supplement the insurance program to allow their far wealthier neighbors to rebuild homes.
Currently the flood insurance program, which is supposed to self-sufficient, owes the U.S. Treasury about $18 billion. Given that annual premium revenues of about $3.1 billion are seldom enough to cover damage costs, the agency has no realistic chance of repaying that money. Instead, when the insurance claims from Sandy are submitted, it will be coming back to Congress to ask for another bailout.
Possible solutions include ending premium subsidies. If all homeowners had to pay an honest premium for their flood insurance, the private sector might be able to compete in providing flood insurance coverage.
Update flood maps so they more realistically reflect flood threats and the resulting cost of premiums.
Increase federal purchases of properties that prove vulnerable to repetitive flood losses. These coastal and riverbank properties could then be converted to flood resistant uses, such as parks, wildlife refuges, campgrounds or golf courses.
The goal of any reforms must be to discourage, and in some cases prohibit, reconstruction in high-risk areas and to move the program closer to self-sufficiency.