Flood Insurance

Drown the Federal Flood Insurance Program

Why is the government encouraging people to live in dangerous, flood-prone areas?


If American politicians want to diminish the harms of flooding, recently on deadly display on the other side of the Atlantic, an easy first step would be to eliminate the National Flood Insurance Program (NFIP). Keeping this failing program in place encourages people to live in dangerous, flood-prone areas.

Established in 1968, the NFIP aimed to reduce post-disaster aid by subsidizing flood insurance. Instead, by artificially lowering the risk premium of building new structures, the program exacerbates disaster-related risk and encourages more building in flood-prone areas. Meanwhile, costs went up, not down: The agency owed more than $25 billion to the U.S. Treasury until 2017, when taxpayers bailed out $16 billion of its debt.)

The program is a perfect example of moral hazard, a phenomenon in which people take more risks knowing they will not bear the full cost of the risk. In this case, the government gives homeowners insurance at premiums far below market prices. The program accepts all applicants, and rates do not increase when the same homeowner makes multiple claims for flooding. All this distorts the market signaling of risk.

The program also suffers from what economists call the time-consistency problem: Even if the NFIP stopped insuring new buildings in flood-prone areas, people know the government has bailed people out in the past and expect it will do so again. To the government, another bailout is seemingly harmless, since people already live in flood-damaged areas. So people keep moving to those areas, and the government keeps bailing them out. The estimated number of people living in America's officially designated Special Flood Hazard Areas rose from 10 million in 1970 to more than 16 million—though some estimates say FEMA vastly underestimates this risk, and the real number is closer to 41 million. The "flood insurance program" is exposing more people to flooding risks.

Nor, for the most part, is the program helping low-income families afford homes. It's not hard to imagine the main demographic of people buying houses in flood-prone coastal areas: high-income families escaping the suburbs for a vacation. Ending the NFIP would move these people away from flood-prone areas by making it more costly to build there.

As politicians go on a spending spree, hiding pet projects hidden in lengthy climate legislation, we need cheaper, smarter, and more effective policies. A private flood insurance market will make premiums expensive for people wanting to build in a flood-prone area—or not offer insurance at all where the risk is too high. That is how the market is supposed to work.

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  1. Federal flood insurance isn’t going anywhere while the current regime has its bitter death grip on power.

    1. Oh I must’ve forgot the Republican salvo against it when they had full power from 2016-2018…

      1. A move you no doubt would have protested.

        1. ^Exactly….

      2. I just bought a brand new BMW after having made $6375 this past one month and just over 12k last 4 week. This is the best and most financially rewarding job I’ve ever had. I actually started this few Weeks ago and almost immediately started to bring home minimum 74BUCKS p/h… Read More

    2. Probably not going anywhere so long as the first primary destination is the Iowa caucus. Regardless of who has the white house.

      Same with agricultural subsidies, and ethynol, and… who wants to try and get nominated with opposition to those sorts of things in their stump speech?

  2. Do not use public money to Renew Orleans

    1. New Orleans not being rebuilt was solely due to the people that live there. It was not a money issue

    2. New Orleans because a Federally Constructed levee failed.

      1. The average elevation of the city is below sea level. It will flood again.

      2. Actually New Orleans took Federal money for upkeep and upgrades to the levee system and spent it on other things like a Visitor’s Center. MSM hushed that up in a hurry since they couldn’t beat Bush over the head with it.

  3. Odds they will ever get rid of this program are near zero.

  4. “The program also suffers from what economists call the time-consistency problem: Even if the NFIP stopped insuring new buildings in flood-prone areas, people know the government has bailed people out in the past and expect it will do so again. ”

    You’re not wrong. The real issue is no politician is going to want to leave existing homeowners high and dry (or low and wet I guess) and you’re right that there won’t be any backbone to forcefully push back against future homeowners that want a bailout too.

    Cities could at least do something and stop approving building in flood plain areas. Fat chance though- money talks after all.

    1. Who’s “money talks” is the real question.. Home insurance really isn’t a correct usage of Gov-Gun-Forces and the very point of Government existence is using Gun-Forces. Otherwise it’d just be a free enterprise asking for customers.

    2. 100,000,000 Americans live in or near the river or ocean coasts, causing immense political pressure to maintain this program.

      The rest live near mudslide-prone, earthquake-prone, or storm-prone areas. FEMA isn’t going anywhere and this program is no exception.

  5. What good is a dead horse unless you can beat it?

    1. Horse burgers?

    2. Glue?
      Horse leather jacket?
      Putting the head in the bed of someone you hate?

  6. Hey! If government does not pay people to be stupid, who will?

    1. Sadly; From my experience; being stupid and lazy pays even better than not being stupid especially if your part of the racist, sexist ‘minority’ signal club of lefty-gov-gun cheer-leading. At this point equality of stupid and lazy would have to take a pay cut to match smart and productive.

    2. Facebook

  7. One little-known glimmer of libertarian sense: the Coastal Barrier Resources System. In 1982, the CBRA decreed that the majority of Atlantic and Gulf coast and a lesser amount of Great Lakes shoreline would not be eligible for FEMA and other federal funding, for development or recovery. Private land-owners could still build, but could not come looking for federal assistance if Mother Nature got mean.

    1. There’s a lot of exceptions to this Act and its subsequent revisions. It only applies to certain sensitive areas that abut beaches and lagoons, where there’s not much desire to build, except by the ultra-wealthy who don’t need insurance subsidies (or easy access to bus lines).

      In all, this act has only saved $2 billion in federal funds over forty years.

  8. Every house should be eligible for flood insurance no more then once. You can take the money and move somewhere else and sell the property at a reduced rate to someone who knows that they can not get insurance on it, or stay and assume all the risk yourself.

    1. As long as Gov-Gun Forces aren’t part of the equation; the best possible solution will be found.

  9. I just bought a brand new BMW after having made $6375 this past one month and just over 12k last 4 week. This is the best and most financially rewarding job I’ve ever had. I actually started this few Weeks ago and almost immediately started to bring home minimum 74BUCKS p/h… http://bucks2.com/

    1. Just don’t use your new fortune to buy a beach front cottage.

  10. I agree, but as soon as you reduce the value of my home to near zero I start pushing back and asking about all the other people who get subsidies to protect or prop-up the value of their assets.

    1. That’s different.

  11. I personally live in a FEMA flood zone and am required to purchase flood insurance while having a Fannie Mae/Freddie Mac-backed loan (which the vast majority in this country are). And I support Reason’s position that we should not be subsizdizing flood insurance.


    The FEMA maps are all over the place, are only generally descriptive estimates of the risks and are not designed for detailed analysis of actual risks. Having just a small corner of your house “described” as being in the zone (as mine is; they overlay the macro maps with satellite photos) and you have to buy still-expensive insurance for the whole place.

    And getting declared out of the flood zone, despite being obviously not in one due to terrain, is damned-near impossible w/o hiring expensive full surveying of your whole property along with full elevation certification. Which I did, and despite meeting the technical requirements I could not get removed from the zone due to bureacratic runaround. I even offered to spend thousands in landscaping and renovations to resolve the “problem” that doesn’t actually exist…nope.

    So I’m focusing on simply paying off my mortgage and telling them to pound sand.

    BTW, the regs only require you to maintain coverage for your principle balance. Tell your broker to drop the coverage down to that value each year, watch their heads asplode.

    1. Caveat emptor. It’s the responsibility of a buyer to ask about limitations, flaws, and costs prior to investing in real estate. If it wasn’t disclosed by the seller and agent, sue them and get a new property.

      1. In our case, the flood zone designation was added to our property *after* we moved in, as a function of a re-mapping.

  12. Many programs exist that I do not think I would vote or pay for if it were up to me. The list of such programs includes the Hubble telescope, the man space program, particle accelerators, and flood insurance. However, I love those programs anyway and I want to take advantage of them to the max. I can’t stop ’em so, I’ll enjoy them. We’ll run out of money at some point but hopefully I’ll be dead by then.

  13. The government should not be subsidizing flood insurance. People should not be living in flood prone areas. We don’t subsidize auto insurance for people who are poor drivers or drive broken down cars with bad brakes. If you can afford a beach house, you can afford the insurance. If you live in the bayous of Louisiana, build your house on some big stilts or move to higher ground.

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