FLOOD INSURANCE

Catastrophic destruction wrought by Hurricanes Harvey and Irma this year, we have witnessed a great deal of wailing and gnashing of teeth in response to the failure of our National Flood Insurance Program (NFIP) to provide enough funding to repair the damage.

Why can’t our government settle the claims? For anybody with even a mediocre understanding of how insurance works, the answer is simple: The cost of covering the damage far exceeds the premiums that have been collected. The money is just not there.

Flood loss estimates for this year range from $6.5 to $9.5 billion for Texas and Louisiana and billions more for Florida and Puerto Rico. The 49 year old NFIP boondoggle, which is already about $25 billion in debt, has only $7.5 billion in cash and credit available. How much more tax gouging will it take to settle the shortfall? We don’t even know. Assessments of the damage are still in progress.

From the time NFIP was begun in 1968, it had been collecting artificially low premiums for high risk coverage. Once this taxpayer-subsidized no-brainer was established, people became very negligent on how and where they built their homes. Development on flood plains exploded. Millions of property owners have had field days building expensive homes in flood-prone locations for the past 49 years. The mindset of no worries about flooding prevailed as long as “Uncle” was there to cover any damage that was certain to happen sooner or later—and often—multiple times. When major storms and floods arrived, like Katrina and Wilma in 2005, the taxpayers had to pony up. Since then, we enjoyed twelve years of limited storm damage, and people became even more negligent.

Some people have been much more reckless than others, and after suffering flood damage, kept repeating their mistakes. During the last 40 years, 3.8% of NFIP policyholders made 35.5% of the claims and collected 30.5% of the flood loss payments. A single Mississippi home was flooded 34 times and the owner collected $633,000 in claims. Yet he could not be denied coverage or charged a premium based on risk. Obviously, a private company would never insure someone like this. He didn’t deserve to be insured. He was nothing more than a freeloader.

Today, NFIP provides about 98% of residential flood insurance. Harvey and Irma have impacted at least 25% (over 1.2 million) of the NFIP covered properties. We are faced with huge unsustainable claims. There is not nearly enough revenue to pay for them. In ethical terms, there is no way to pay. As we say, “The chickens have come home to roost.”

Government-run flood insurance, like Obamacare and government-run anything, is clearly a disaster. The reason private companies would never provide flood coverage with low premiums is that they would quickly lose money and become bankrupt. An insurance company, like any business, must make a profit to survive.

There is only one solution to this dilemma, but at least it’s a very simple one: Abolish and de-fund the NFIP immediately. Stop the program that encourages people to recklessly exploit the American taxpayers. In the long run, it will greatly reduce property losses and even save lives. We may feel sorry for the people who have lost their property, but we can’t ethically steal money from others to pay for it. Over time, volunteers can chip in and help the people rebuild. Yes, it will take a long time. But at least with a free market and government out of the way, people will learn how to build—or not build—in flood and storm prone locations.

If we quit subsidizing reckless development, it will stop on its own or at least slow down. People will be motivated to build responsibly. They can add fill before building homes in low-lying areas. On expensive beach front property, developers will have incentives to invest in sturdy reinforced concrete structures on well elevated foundations. It is foolhardy to skimp on a $10 million building on a $5 million waterfront lot in Florida where hurricanes and storm surges occur on a regular basis.

If it was up to private companies to provid flood insurance, there are several options that clients could take to mitigate the premiums. Avoid building on a flood plain or other flood prone area. Construct a mound and build a house on it. In coastal areas, build on reinforced concrete stilts. In storm prone areas, build with reinforced concrete and/or steel. A good insurance company could provide advice on how to build in a particular area to minimize risk and thus minimize the premium. That’s the way a free market works—for insurance or anything else. Once free of government intrusion, everybody benefits and nobody loses.