Should the Federal Government Be Subsidizing Flood Insurance?

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John Minchillo / AP

Vehicles are submerged on 14th Street near the Consolidated Edison power plant in New York City on Oct. 29, 2012

As Hurricane Sandy continues to batter the Eastern seaboard of the U.S., one thing is for certain: insurance companies will be ponying up for billions of dollars in property damage caused by high winds. Last year’s Hurricane Irene cost insurance providers more than $4 billion in damage claims, with flood-insurance payments totaling nearly $1.3 billion.

But what many Americans may not know is that this $1.3 billion was a bill footed by the federal government, which underwrites the vast majority of flood insurance across the nation. Historically, insurance companies have been wary of offering flood insurance to homeowners because the risks associated with flood insurance are difficult to forecast, so any private insurance that had been offered was prohibitively expensive for average homeowners.

But in the 1960s, frequent flooding of the Mississippi River was driving up the costs of federal disaster-relief programs. In an effort to reduce these costs, Congress set up the National Flood Insurance Program (NFIP) to provide flood insurance to the general public and promote effective floodplain management. Under the program, homeowners in certain areas of the U.S. are required to buy flood insurance, and communities that hope to benefit from the program have to enforce city-planning regulations set out by FEMA, which manages NFIP.

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Though the program has been effective at making flood insurance widely available, a growing chorus of critics from environmentalists to libertarians has been attacking it for encouraging homeowners to build recklessly in areas that are prone to flooding. For instance, Ira Stoll wrote yesterday in the New York Sun:

“Hurricane casualties are partly the result of unintended consequences of government actions: without federal flood insurance, many fewer people would take the risk of living in low-lying areas vulnerable to storm surges.”

There is evidence to support the view that the government is actually encouraging citizens to live in areas most in danger of flood damage. According to a 2010 report issued by the Institute for Policy Integrity, Congress has historically set the premium rate too low for flood insurance — effectively subsidizing building in flood-prone areas at the expense of taxpayers at large. This practice has helped drive the fund $19 billion in debt, caused mostly by the unusually severe damage caused by Hurricane Katrina.

In addition, the report argued that the environmental effects of the federal government’s flood-insurance policy may be more severe than the financial effects. According to the report:

“River basins and coastal zones provide natural purification of water and wastewater; erosion control and weather mitigation; and habitat for fish and wildlife. They also offer opportunities for valuable recreational use, improve irrigation return flows for agriculture, and support fisheries and other raw natural resources with considerable economic value.”

Subsidizing building in these areas can have environmental costs that far outweigh the actual cost of subsidization.

The report also found that the NFIP usually benefits the very wealthy at the expense of the poor. Excluding payments made as a result of Hurricane Katrina, “the wealthiest counties in the country filed 3.5 times more claims and received over a billion dollars more in claim payments than the poorest counties,” between 1998 and 2008.

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In July, Congress extended the program through 2017 and tried to address some of these concerns by raising premiums on insurance holders, increasing the minimum deductible and requiring the NFIP administrator to come up with a plan to resolve its debt problem. Mike Barry of the Insurance Information Institute argues that these reforms have “put the NFIP on more actuarially sound footing going forward.”

And while the NFIP does help a number of wealthier citizens find insurance, that doesn’t mean it doesn’t help poorer Americans who without the program would probably have no way of getting their properties insured. If the NFIP were to disappear tomorrow, “people would be very hard pressed to find cost-effective flood insurance,” and for many Americans “it would be a significant financial burden.”

And the fact that so many homeowners and businesses rely on this program is good reason to believe that we won’t see it disappear anytime soon. Even if we are convinced that government-supported flood insurance does transfer wealth from the poor and the middle class toward wealthy owners of vacation homes, or that it encourages environmentally detrimental development of coastal areas, the program would be very difficult to get rid of. The reason: the countless Americans who have bought homes and businesses under the assumption that this insurance would be available. If the government were to pull the rug out from under those people now, they would most likely lose their insurance and see their property values tumble.

The bill that reformed and extended the NFIP was one of the few bills to make it through a profoundly gridlocked Washington, D.C., this summer, and it’s not difficult to see what separated it from the pack. Like many other government programs like the home-interest deduction and agricultural subsidies — which are reviled by economists as distortionary — the NFIP is fiercely defended by those who benefit from it. Representatives from districts that benefit from the NFIP will fight to keep the program, while the stakes are lower for those who bear the costs.

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While many agree that the government shouldn't be in the insurance business here are the frustrating facts:

People in queens NY that were responsible enough to invest in insurance were covered.

However many of those families had finished apartments and theater rooms in their basements.

Flood Insurance will only pay for standard repairs to make the basement dry again. It will not cover all of the extra expenses to finish the basement out as it was.

On the other hand, those that had NO insurance often did better off as FEMA paid for almost everything as reported at

Go figure.


The governement should not be in the insurance business.  If a person can afford a $300G beachfront home, he should get his insurance from a private insurance co.  If the private insurance co rates are too high, that should be a red flag to not buy that house.  Everyone in Manhattan should have to pay the going rate.  If they can't afford the rates, MOVE.  We taxpayers can't afford your choice.  The same goes for New Orleans.  We spent Billions to rebuild areas that is subject to be flooded out again at any time. 


The government should not subsidize flood insurance.

A farmer whose land floods every several years enjoys the larger harvest of a more fertile land when the floods do not occur. 

A vacationeer whose ocean front property is destroyed every few decades enjoys immeasurable value every season without devastation.

Want land which does not flood? Pay for the land which does not flood.


Would it make sense to "limit" the NFIP payouts?  For example, if the most you could possibly receive from an NFIP claim was $500,000 (an example number that may not be at all practical), it would help prevent poorer contributors subsidizing richer ones excessively, provide a small measure of cost certainty for the plan's managers, and probably wouldn't impact the majority of NFIP plan holders.  Obviously there could be a significant impact on wealthier homeowners, but they're the ones who are most likely able to afford additional private protection if they want it (and for those that don't, a half-mill should be able to still provide access to a livable alternative).


Lower Manhattan is Now a Flood Zone - Should it be Abandoned? There will be a re-thinking of MUCH concerning the Immorality of INSURANCE of ANY kind in the future as Insurers ABANDON us because of Changing Conditions - Global Warming and an AGING Population - The Models that worked in the PAST will no longer work.  In the case of an AGING population we will come to Realize that MEDICARE for ALL - Single Payer is the ONLY way we can provide Health Care in this Country - and as for the TRILLION Dollar price tag for Global Warming Damages over the coming Decades - We have to REVERSE the trend by ENDING our burning of Fossil Fuels to SURVIVE as a SPECIES. 


Thinking like that is what is wrong with this country.  You are a complete idiot.

gello22 1 Like

No private insurer would touch this coverage for good reason. The Feds do for the wrong reasons, NO insurance no bank loans, no fancy beach houses, no high real estate taxes for "water front view" the mayor and county officials salary go down.  The claims are paid and guess what, they are allowed to rebuild in the same flood plain and buy "flood insurance" again.


@gello22 That's a good point. Why are they allowed to rebuild in the same flood zone where they were already flooded out of? If the government plan made it a requirement that the people who get flooded out build outside of a flood plain, this would, over time, alleviate the problem. 

"We'll give you flood insurance, but if you get flooded, you have to rebuild outside a flood plain."

Makes sense to me.