Natural Disasters

Congress Votes to Continue Flood Insurance Folly


Greene County Flood 1995 -- kind of the way my backyard looked

I have a small cabin at the base of the Blue Ridge Mountains in Greene County, Virginia. In 1995, a 500-year flood hit Greene and Madison Counties in which vast quantities of rock and tree-laden debris scoured the mountains as water cascaded down newly created gullies. My cabin survived although debris opened a gully where my septic field had been. Since the government so kindly offered me taxpayer subsidized flood insurance, I thought it churlish of me not to buy some. My cabin is not in a flood plain, so the premium is quite reasonable.

Flood insurance in the United States is essentially offered only by the National Flood Insurance Program (NFIP). The program still owes the federal treasury nearly $18 billion from the 2005 Hurricane Katrina disasters. The San Francisco Chronicle reports that the House voted 406-22 to renew the program for another five years. Forty years ago, the Feds often paid victims for flood damage, so the program was established in an attempt to get people to pay their own way by buying insurance. Ah, but the unintended consequences of government meddling in markets soon appeared—more people chose to build in harm's way on flood plains and coasts. In 2006, the Freeman reported:

A 1997 Idaho Statesman report on a Boise river flood concluded that the NFIP "has backfired—bringing more people into harm's way" and has made risky development "look not only possible, but attractive." Doug Hardman, Boise-Ada County emergency services coordinator, observed that subsidized flood insurance "did exactly the opposite of what it was designed to do. It has encouraged people to move there and encouraged developers to develop there." The NFIP amounts to a type of anti-environmental socialism. Scott Faber of American Rivers, a conservation organization, observed, "Prior to the 1960s, you didn't have much development in flood-prone areas because you couldn't find any insurer crazy enough to underwrite it. But the federal government came along and said it is okay—we are going to make it financially possible for you to live in a flood plain. The effect of this has been much more dramatic in coastal areas, where we have seen a huge boom in coastal development in the last 30 years."

The primary effect of federal flood insurance is that far more property is now damaged by floods than would have occurred if the insurance had not made it possible to build in flood-prone areas.The Long Island Regional Planning Board in 1989 complained that federal flood insurance "in effect encourages a cycle of repeated flood losses and policy claims." And, especially in places like Long Island, the program underwrites the vacation homes of the wealthy.

How to unravel this situation? Frankly, I generally believe that if you live by government subsidy, then you should die by its withdrawal. However, the free market Competitive Enterprise Institute offered some reform proposals [PDF] in 2008 which featured (1) land buyouts for propeties in the most flood-prone areas, perhaps converting them to public parks; (2) some policies would likely have value in private insurance markets, so sell them off; and (3) and phase out NFIP entirely by offering one time tax credits or grants to cover the declines in property value that terminating flood insurance might cause insured property owners.

Flood insurance is another example of government failure. After a government wind insurance scheme failed in 2008 when hurricanes struck the Texas coast, I explained:

The fact that insurance companies refused to insure property located on storm-wracked coasts is not an instance of market failure. A market failure supposedly occurs when the price of goods and services do not reflect the true costs of producing and consuming those goods and services. That's clearly not what happened here. The market is practially shouting at people, "Don't build something you can't afford to lose where hurricanes periodically crash ashore."

Instead the state "insurance" scheme is an example of government failure which occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention. In this case, it's the government that's telling people that it's OK to build in dangerous areas and then not charging them enough for the "insurance."

As background, you might want to read John Stossel's excellent 2004 Reason article about his flood insurance adventures concerning his Long Island beach house, Confessions of a Welfare Queen.

NEXT: Temptations of Empire

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  1. We all know market failure occurs when goods and services are not delivered to everyone who wants them, regardless of ability to pay.

    The market failed to give everybody everything. Ergo, it failed.

    Isn’t that how this works?

    1. Yes. The market has failed to provide me a Bentley at a price I can afford to pay. and that’s not fair.

        1. $97k ? What kind of low life buys a used Bentley.


    2. You joke, but I’m fairly certain Tony actually believes this.

      Which makes me weep for the human race.

  2. A 1997 Idaho Statesman report on a Boise river flood concluded that the NFIP “has backfired?bringing more people into harm’s way” and has made risky development “look not only possible, but attractive.”

    Fucking incentives- how do they work?

  3. I have been saying thsi for years. Don’t build shit you want to keep on coastal barrier islands. It will be destroyed.

    I fucking hate that we subsidize people living on teh coast because everybody thinks an ocean view is a nice idea. I want to live in a Fotress of Solitude at the Mountains of Madness. Am I getting a subsidy to make that possible? No? Then fuck all you welfare queens that want to live on the coast on everybody else’s dime.

    But then again, I live in the Houston metro area and one of the things I do before I buy property is try to figure out if it’s gonna flood in an Allison- level event. If my answer comes up yes, I don’t buy.

    1. I want to live in a Fortress of Solitude at the Mountains of Madness. Am I getting a subsidy to make that possible?

      I heard that. I want to live in the Fortress of the Barely Legal Babes, and those assholes aren’t helping me, either.

      1. I want to live in Castle Anthrax

        1. What a terrible name for such a lovely place. So much peril.

          1. I could face the peril

          2. Look, let me go back in there and face the peril.

              1. Am not.

    2. You can find a place in Houston that won’t flood if it gets 24 inches of rain in 24 hours? Where is it? I remember our neighborhood didn’t flood, but we were northwest of the city and didn’t get the full brunt.

      1. 24″ in 24 hours is can be dealt with if you keep your drainage free of debris and you live in a zone X area. My parents lived near Cypress Creek and didn’t suffer even lawn flooding. But they lived in a neighborhood with halfway decent drainage and have an elevated plat.

        1. Small world. We lived in Cypress at the time.

      2. My old house in Deer Park didn’t flood during Allison. Now I live in Spring, and if I flood, you’d better have a spot on the boat with the old Jewish guy.

        We were actually house shopping during and after Allison. One of our quick checks was driving through neighborhoods and seeing if there was carpet on the curb for trash pickup.

        1. Indeed, Spring is pretty high and decently developed, though sprawl is going to endanger it, especially with all of the cheap neighborhoods being developed with lots of concrete and minimum detention. But that’s just the way it goes.

    3. Before the Government flood insurance program beach houses were often trailers, cinder block or small wood frame structures. Views were unobstruted and access was easy and abundant. When I point this out to people with waterfront property (or who profit from its development) I’m often accused of not respecting private property. Environmentalists don’t waste a lot of breath bitching about it either.

    4. is the best thing to happen to Houston real estate. I have no idea how you found out whether you were screwed or not before that. Of course some of the most expensive real estate is in the 100 year flood plain southwest of downtown.

  4. Speaking of market failures, what happened to all those people who, just a few years ago, were weeping and wailing about the lack of “affordable housing”?

    Not only are they not cheering because housing really has become more affordable, they are trying to push housing prices back up.

  5. There’s probably some P&C insurer willing to buy part of their book. Anything in a 500 year flood zone or higher will probably look good actuarially, depending on the premiums.

    1. I work in the P & C industry and am close to all of this. No state department of insurance is going to allow actuarial sound flood rates because the poor won’t be able to afford it.

      1. For the 500 year zones (and better) they might. I agree that 100-500 would be a much tougher sell to get profitable rates from rate commissions, and < 100 no sane P&C company would touch in any event.

        1. Wouldn’t it depend on the replacement cost of the property?

          A low-value, easy-to-replace cabin might be insurable, because the premium needed could theoretically still be within the borrower’s range when expressed as a monthly payment.

  6. …of that mandatory flood insurance. I live in a “100-year-flood plain.” I am ha ha happy to see my $10,000 over the last 10 years (I pay the maximum allowed) being used to bail out the people who live in actual below river- or sea-level areas…or on expensive hurricane-coast properties….and who may have mandatory insurance, but pay no more than I do — what a racket.

    1. Ummm…that’s how insurance works. You’re still underpaying for your risk. In a 30 year mortgage, you have a 30% chance of catastrophic damage, which would require a rebuild. If your house is worth over $100,000, you’re coming out ahead.

      1. ….mandatory, not like mortgage-company mandatory which is one thing, but like federal govt mandatory….oh well since they backed the loan oh yeah…..

        1. yeah, if you pay cash, you don’t have to insure shit.

      2. In a 30 year mortgage, you have a 30% chance of catastrophic damage, which would require a rebuild.

        No one on earth knows the odds of catastrophic damage happening to anyone over a 30 year period. Claiming so is false and a glaring misunderstanding of statistics and probability.

        It’s correct to say only thus:

        On average 3 out of 10 persons who held their same improved land during the same30-year period suffered catastrophic damage, which totaled $X. If we are going to guarantee to others that we’ll pay their portion of a similar sum of damage over the next 30 years, hence give them assurance their losses can get covered, we need to charge each one we assure, a set amount, which we shall call a premium.

        That’s how insurance works.

        The problem with most insurers is that they do not restrict collected premiums to designated geographic areas. Instead they take on ever more risk and assume they can use premiums taken from Peter (Flood Plain, Missouri) can get used to pay off Paul (Hurricane, Florida) while still coming out ahead.

        Of course, in the event that an insurer actually pays a claim, the insurer writes-off the loss as an expense. Thus, taxpayers are on the hook in the end for all insurance.

        It’s all quite a racket.

        Insurers should not be allowed to write off losses. They’re gambling.

  7. Frankly, I generally believe that if you live by government subsidy, then you should die by its withdrawl [sic].

    Take that, granny on social security!

    1. juice: Granny can fend for herself. Will fix typo though. Thanks.

  8. There’s also an issue with flood maps changing and not changing…

    I’ve come across more than one case where the Army Corps will put a flood channel in somewhere, but they never bother processing their changes with FEMA. So the FEMA floodmaps (which show everyone where the flood plains and floodways are) aren’t updated–until some developer comes along and spends the huge amount of money required to do an independent hydro analysis and have the flood map changed by FEMA…

    It’s actually an excellent way for a developer to garner some good will with a city–we can get rid of 90% of the flood plain by simply spending the money and effort to get FEMA to update their map!

    Also, as the Army Corps changes flood control, it can sometimes put people in the floodways where there were none before. If someone who wasn’t in a floodway before suddenly finds themselves in once now due to the actions of a government agency–I’m not so sure the government shouldn’t be responsible for insuring their property against flood.

    If something I did put you in a floodway, where you weren’t in one before–why wouldn’t I be responsible for insuring your property against a flood?

    1. That being said, the government should get out of the flood insurance business as much as it can.

      I just don’t think it’s possible to get out of it completely–unless and until the government starts seizing people’s property and paying them with all due haste at market rates*…

      And that’s just ain’t gonna happen.

      *And who’s to say what the market rates is?

      1. How about if the government said we’re not doing this program anymore, but we’ll allow you to take a tax credit equal to your capital loss?

        Because remember, the so-called current market price of the property is not actually a market price. It’s the price as warped by the subsidy.

        1. I was talking about people who weren’t in a flood plain previously.

          When they bought that house 20 years ago, there was no flood plain. Then the Army Corps put in a flood channel, and now in 100 year flood events, the overflow turned your property into a flood plain–where there was none before.

          That’s not unusual. It happens often.

          If those people so affected can’t insure their property against flood anymore, then the value of their property takes an enormous hit. So, the market price of uninsurable property is very low.

          Banks require buyers to get fire insurance and flood insurance–especially if you’re in a flood plain. I don’t think a bank would lend to anyone that wanted to buy your property in a new flood plain–if they couldn’t get flood insurance.

          It’s a tough thing. This is why I’m not an anarchist. Flood control is one of oldest functions of government going back to the Sumerians–probably for this reason. One of the few legitimate functions of government is sorting through people’s conflicting rights–that’s what enforcing contracts is all about. Flood control is like that too. Saving 90% of a city from a flood disaster can put the other 10% in danger where there was none before. There may not be a neat and tidy purely libertarian solution to that problem. Other than the observation that people’s rights can and do sometimes conflict–and sorting those out is one of the few legitimate functions of government.

          1. But if the Corps of Engineers stopped doing new flood control projects, wouldn’t that eliminate the possibility of state action pushing the unsuspecting into a flood plain?

            So wouldn’t the solution to the problem again be less state action?

            1. flood control project in my area several years back. I eagerly awaited the new map to come out and nothing had changed. Before, flood plain, after flood plain, zone A.

              1. “flood control project in my area several years back. I eagerly awaited the new map to come out and nothing had changed. Before, flood plain, after flood plain, zone A.”

                On one of my projects, the flood map at FEMA hadn’t been updated to reflect a flood channel that had been put in by the Army Corps some fifteen years earlier…

                The Army Corps doesn’t work for FEMA (nor visa versa), and as the Katrina situation showed, those two agencies don’t play well with each other.

                The Army Corps doesn’t ask for FEMA’s permission, and FEMA doesn’t spend the money or time to update their flood maps with what the Army Corps does. So somebody has to shell out for that.

                It takes a lot of money and effort to update a FEMA flood map, and the Army Corps isn’t about to spend that money and effort–that’s not their job.

                You may very well have been taken out of the flood plain, it’s just that they didn’t update your portion of the flood map. That’s one reason we were able to garner so much good will in this one particular city–it didn’t cost much more to update the other half of town at the same time as we updated our property. And it could easily cost you $100,000 to update the map…

                So, hire a hydrology consultant to do the flood analysis–and you may get out of the map. Until somebody does the analysis though and gets it processed through FEMA–nobody’s gonna do all that work for you for free. Not the Army Corps or FEMA, and most cities are too cash strapped right now to spend money on that.

            2. Yeah, if you can get the government to stop doing things to prevent flooding, then less government action might improve that situation.

    2. “If someone who wasn’t in a floodway before suddenly finds themselves in once now due to the actions of a government agency–I’m not so sure the government shouldn’t be responsible for insuring their property against flood.”
      Well, a town called Half Moon Bay sorta did that. After development was approved, they dammed some streams and called the area “wetlands”. And they got busted:
      “But Half Moon Bay has another, less obvious, passion-the blood sport of pitting developers and conservationists against each other in fierce battles over coastal land use.”…..570&evid=1

  9. I think the other thing to note is that this program demonstrably changed the way the country looks.

    I blame it for the atrocity otherwise known as Florida.

    1. Florida, the ostensibly red state that probably soaks in more subsidies in total than any other state.

  10. Recent archaeological discoveries of entire cities that were uncovered after the Boxing Day Tsunami, such as the ones at Mahabalipuram in India, have proven that the seas themselves have swallowed up entire coastal regions throughout history. What this does is show that coastal cities in particular throughout the world have always been dealing with the encroaching seas, yet we continue to expand coastal cities as population centers. The folks at Mahabalipuram didn’t have flood insurance.

    It is a bit of an “inconvenient truth” that the seas have risen -dramatically at times- over thousands of years as part of the natural process of the earth.

    (see what I did there?)

    1. I see what you did there.

      Frankly, I love the coast and if you build your house right, you can deal with most erosion/flooding issues. It just isn’t cheap and people love cheap coastal living.

      1. Hence those old school beach houses SIV mentions. You can still see a few of them along the Texas gulf coast. Basically, it’s a shot gun shack up on stilts. If it floods or blows away, so what?

  11. Hi, Ronald

    The county I live in told my mother in law that she could not purchase flood insurance for her home, because she was not in a flood zone. Is there any way around this? Besides she said she is willing to pay for it.

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