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Is Federal Flood Insurance Defensible?


In the aftermath of Superstorm Sandy, the National Flood Insurance Program has come under intense scrutiny.

MINYANVILLE ORIGINAL Superstorm Sandy facilitated the coming together of Americans in many ways. Of course, people from all walks of life banded together to contribute to recovery efforts in the tri-state area. Unexpectedly, the destruction wreaked in the fall has also brought together Americans from differing ideological spectrums.

The issue at hand is the Federal Emergency Management Agency's (FEMA) National Flood Insurance Program (NFIP), which is a federally-backed insurance program sold through most private insurers, such as ACE (NYSE:ACE), AIG (NYSE:AIG), Progressive (NYSE:PGR), Hartford (NYSE:HIG), and Travelers (NYSE:TRV), that covers Americans living in flood-prone areas.

Damage wreaked by Hurricane Sandy in Seaside Heights, New Jersey. Source: Wikipedia
Before Sandy made landfall, the NFIP was already at least $17.75 billion in debt, and the final costs of the storm could wipe out the program's remaining $3 billion statutory borrowing authority.

Libertarians, unsurprisingly, are against the NFIP. Fox Business Network personality John Stossel, for example, wrote an article on the flaws of the program just over a month before Sandy struck the US.
Private insurance companies were reluctant to sell insurance to those of us who build on the edges of oceans, and were they to offer it, they'd charge an arm and a leg to cover the risk. But this wasn't a problem for me, because you offered to insure my house. I know you didn't do it personally, but you, as a taxpayer, are the guarantee behind federal flood insurance. Should a big storm wipe out half the coast, you'll cover our losses - up to a quarter-million dollars. Thanks - we appreciate it - but what a dumb policy.

Stossel argued that the NFIP all but incentivizes people to build property in flood-prone coastal areas, and that its cheap insurance premiums disproportionately benefited affluent homeowners with beachfront property.

However, in the aftermath of Sandy, even the more liberal New York Times published an editorial calling for the end of the NFIP.
Homeowners and businesses should be responsible for purchasing their own flood insurance on the private market, if they can find it. If they can't, then the market is telling them that where they live is too dangerous. If they choose to live in harm's way, they should bear the cost of that risk - not the taxpayers. Government's primary role is ensuring the safety of its citizens, so the government's subsidizing of risky behavior is completely backward....

The bottom line is that the flood insurance program is a fiscal time bomb for the government.

We should phase out the program, begin thinking strategically about how to shift populations away from the most risky coastal areas, and use the best available science to update the woefully out-of-date coastal-zone risk profiles that government agencies currently rely on to determine danger. We also need to encourage more stringent building codes that take into account the full range of climate risks. (Officials in New York and New Jersey this week estimated the overall costs of Hurricane Sandy in the two states at a combined $72 billion.)

With Americans across the political spectrum coming out against the NFIP, is the program defensible? Yes, Ann Myhr, senior director of knowledge resources for The Institutes, a leader in property-casualty insurance education, tells Minyanville.

Myhr says that there are a lot of provisions within the NFIP before a community can participate in the program.

She said, "[Communities] have to agree to participate in mitigation activities to lower the overall risk. They have to adopt certain land use regulations. That's why in towns with rivers that run through them – a lot of the land that is adjacent to the river is just a park or a parking lot."
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