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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.

Myhr also points out that the NFIP only insures up to $250,000 on a building and up to $100,000 on contents, "so it's not like it's a blank check," and wouldn't really help cover damage costs for the owner of a house worth millions.

As for the charge that the NFIP incentivizes risky behavior, Ken and Kate Goodersham of the American Shore & Beach Preservation Association wrote at the Gasparilla Gazette that it was actually the other way around. They asserted that people will always build beachfront properties, as they did before the appearance of the NFIP. Affordable NFIP rates, then, "[enable] government to apply the stick (better flood mitigation and building standards) to help reduce the overall risk of flood damage to properties."

Gavin Smith, the executive director at the Coastal Hazards Center at the University of North Carolina at Chapel Hill, tells Minyanville that the NFIP could be improved nonetheless. For example, he calls for "increasing incentives at the individual level to make improvements -- like in the current federal program, there's something about a community program where if you do X or build Y to improve flood safetyness, your premiums as a community go down. The problem is that this is easier to do for communities with resources and money."

In fact, the NFIP was only just re-authorized last summer through the Biggert-Waters Flood Insurance Act, which extended the program through 2017. Myhr says that the act was designed to respond to critiques of the federal flood insurance program.

Annual premiums increase caps, for instance, were raised to 20% for newer homes, and 25% for those built before the program, compared to 10% in the past. FEMA has also updated its flood zone mapping along the entire US coastline, with the net effect being that more properties are now considered to be in risky flood zones. The Climate Science Watch blog reported on further changes that were made this past summer to make sure the NFIP could be sustained in the future:
For starters, those who do not have flood insurance, but reside in a flood plain or newly updated flood hazard zones, will be required to purchase insurance. Insuring properties with repeated severe loss claims due to flooding will be phased out. Subsidies for vacation and second homes will also be phased out, along with business properties, homes substantially damaged or improved (i.e., in amounts greater than a percentage of the market value), and homes sold to new owners. This means less liability burden for the program. New provisions make it easier to apply for the Federal Emergency Management Agency's (FEMA) buyout program. The homes substantially damaged by flooding would be purchased by FEMA and demolished, left as open space so no future claims will be incurred.

Myhr says that the NFIP is not perfect, but that it remains "important from the perspective of consumers because [flood insurance] is not available under standard homeowners' insurance policies."

"Can the NFIP be improved? Certainly, I think that any program can be improved. In light of Sandy, we may see some more recommendations and some actions taken to strengthen the program," says Myhr. "[Nonetheless,] I believe that the changes that were made go a long way in responding to some of the concerns [of critics.]"

Twitter: @sterlingwong
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