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Does Flood Insurance Just Make Things Worse?

When Hurricane Katrina made landfall in southeastern Louisiana on August 29, 2005, it caused extreme flooding up and down the Gulf coastline. Four years later, the Gulf has made a dramatic recovery—thanks in part to the billions of dollars in aid sent via the national flood insurance program. The hurricane certainly underscored the need for federal aid in the event of a natural disaster. But was the federal flood insurance program the best way to get aid to those in need?

Some background: The National Flood Insurance Program, run by FEMA, provides insurance to homes that lie in floodplains. These policies are almost always the homeowner’s only option, since private companies rarely offer flood insurance. That means the government is taking on a large number of risky policies, but it can't take measures to bolster its bottom line, like increasing rates, eliminating coverage for the most disaster-prone properties, or holding reserve funds. Even the process of updating floodplain maps is contentious and politicized. The end result is that the government has to borrow billions to pay out when disaster strikes—$19 billion in the case of Katrina.

What's more, distortions in the program mean that it doesn't always direct taxpayer dollars to flood victims who need the most help. A good portion of the funds ends up benefiting owners of expensive homes at significant cost to taxpayers. (Over the past ten years, excluding Katrina, the wealthiest counties in the Gulf filed 3.5 times as many claims—and received $1 billion more in payments—than the poorest counties.) Worse, as it's currently structured, the program may encourage development in risky, low-lying and coastal locations, places that are often the most ecologically sensitive.

Rather than living with a system that can increase environmental damages and is at constant risk of requiring taxpayer bailouts, we could devise an alternative system that requires policies to be sold at market rates or reduces the cap on coverage. One solution would be for the government to get out of the business of providing insurance to everyone living in a flood zone and focus instead on delivering aid to those most in need. Victims of natural disasters do need aid, but flood insurance has proven to be clumsy and inefficient in many ways.

At the very least, the program doesn't need to be expanded by adding wind damage to the policies, as Congressman Ron Klein (D-FL) has been suggesting. At present, the flood-insurance program is already racking up $730 million in interest payments each year and writing an average of about 170,000 new policies. Another epic hurricane could plunge the program even deeper into debt. Adding to that burden, without fixing the existing inefficiencies, is just pouring money down the drain.

Michael A. Livermore is the executive director of the Institute for Policy Integrity at New York University School of Law. He is the author, along with Richard L. Revesz, of Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health.