A lifeboat for flood insurance: Roll back out-of-date government ‘safety net’

Everyone has their favorite example of a government program they wish could be reformed. Of course, the devil is often in the details, as politicians and citizens on both sides of the aisle tend to disagree about what constitutes “wasting” taxpayer money. It’s rare to find a program – any program – with bipartisan support for changing the status quo.

The National Flood Insurance Program, or NFIP, though, is such a program. Under the Federal Emergency Management Agency (FEMA), NFIP “aims to reduce the impact of flooding on private and public structures” by encouraging flood management planning and providing affordable insurance. But what it too often does instead is distort the marketplace, encourage risk and put taxpayers on the hook – and members of both parties have taken notice.

{mosads}Sens. Dean Heller (R-Nev.) and Jon Tester (D-Mont.) have introduced S.563, the Flood Insurance Market Parity and Modernization Act, which would expand the private flood insurance market. It passed the House last session and has now been reintroduced in the Senate and House.

NFIP was created in 1968 when Congress wanted to deal with a perceived lack of affordable options for people who needed to purchase flood insurance. Since then, a burgeoning private market has developed, but now-antiquated federal regulations incentivize people not to choose private options.

The Congressional Budget Office recently analyzed NFIP, which is up for reauthorization this year. The total cost of the program is estimated at $5.7 billion — $5 billion of which is for claims and expected claims, and the rest for interest on debt, mitigation, and flood mapping. Only $4.3 billion was collected in premiums, which means the program is operating on a deficit of about $1.4 billion.

Last year was one of NFIP’s worst to date – with roughly $3.7 billion in payouts, the program is now $25 billion in debt.

In Washington, sadly, this amount is barely a drop in the bucket, but much bigger problems loom. Hurricane Sandy and Katrina’s death tolls and economic losses of $50 billion and $108 billion respectively are grim reminders of the human cost of poor mitigation policies. The $10 billion NFIP bailout after Hurricane Sandy is a reminder of the risk taxpayers bear.

Luckily, House Financial Services is expected to release a five-year reauthorization plan that includes several key reforms. After a sluggish session start and an omnibus bill that disappointed many conservatives, President Trump and congressional leaders have an easy chance to forge ahead on bipartisan reforms that can save money and not keep flooding the swamp, if you will, with bad policy.

As with any spending reform, expect a chorus of loud claims of disaster to come, even though the data suggest that common fears are misplaced.

For instance, the Reinsurance Association of America studied the idea that private sector competition could further harm NFIP’s solvency, as private insurers poach lower-risk properties and taxpayers bear the brunt of the rest.

The association looked at an experience in Florida, where the state-run wind insurer, Florida’s Citizens Property Insurance Corporation, began to privatize, ultimately reducing its policies by more than half. Rather than causing financial strain, this adjustment allowed Citizens to cover the properties they held without requiring further tax dollars, while private insurers were able to provide competitive plans even in riskier areas.

In other words, making the market more competitive can actually mean the subsidized program gets more solvent, while riskier plans are provided in the private marketplace as well.

More often than not, in fact, private plans supplement the NFIP for riskier coverage, not the other way around.

Time will tell whether the 115^th Congress will be the one to finally make serious and lasting reforms to the National Flood Insurance Program, but as costs continue to rise and the federal government operates under a large and growing budget deficit, all options should be on the table – especially common-sense, smart policies that can help the lives of those who depend upon them the most.

Jonathan Bydlak is the founder and president of the Coalition to Reduce Spending, a non-partisan advocate for lower federal spending and the creator of SpendingTracker.org. He is a fiscal policy expert and also served as director of fundraising on Ron Paul’s 2008 presidential campaign. Jonathan holds a degree in economics from Princeton University. Follow him on Twitter @jbydlak and @Reduce_Spending.

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