Dead in the Water
The federal flood insurance fiasco.
Jan 28, 2013, Vol. 18, No. 19 • By ELI LEHRER
Everybody who has taken a close look at the NFIP realizes that the program is a mess. Once the symbolic votes to end the program had passed, both Democrats and Republicans came to basically the same conclusions that changes needed to happen. A set of reforms that became law last summer was written jointly by the moderate Republican Rep. Judy Biggert (R-Ill.) and far-left Maxine Waters (D-Calif.). That bill promises to improve maps, phase out some premium subsidies, and allow the program to transfer some of its risk to private reinsurers (insurers for insurance companies).
All of these changes make sense, and no sizable organized group stood against them, but they’re hardly the kinds of radical reforms that the program would need to put itself on firm fiscal footing for the long term. Even if all of the proposed changes work as promised, the program’s finances will remain such that any state regulator who looked over its books would forbid it from operating if it were a private company, on the basis that it can’t pay the claims it will reasonably expect to receive. At best, it will take an additional round of reforms—reforms that are unlikely to until the current program expires in September 2017—for the private sector to seriously begin assuming the liability. And that assumes Congress has the political will to ask coastal property owners to see their property insurance bills soar.
Better by far that the program had never been started. International examples show that private flood insurance can work. Germany and the United Kingdom, among other countries, write almost all flood insurance through private parties. While the business isn’t a major profit center for the insurance industry, it, at least, isn’t a taxpayer liability. And building is deterred in the most flood-prone areas.
More than anything else, the NFIP offers a stern warning to anybody who wants government to solve every problem. In the case of flood insurance, even the existence of a market failure didn’t mean the public sector necessarily had a better solution. For the foreseeable future, America is stuck with the NFIP.
Eli Lehrer is president of the R Street Institute and a contributing author to the new book Risky Business: Insurance Markets and Regulation (Independent Institute).