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If you crash your car repeatedly, you can count on your insurance premium shooting up. Crash often enough and your insurer will drop you. But there's a special kind of insurance that doesn't punish you for having the same accident over and over again. And here's the punch line: It's a government program that's already left tax-payers like you on the hook for $17 billion—and counting.
This boondoggle is called the National Flood Insurance Program. Over the past three decades, the NFIP has paid out more than $9 billion in flood insurance claims to the owners of more than 140,000 properties that have flooded more than once within a ten-year period. Some of these properties have flooded a dozen times. One house in Houston has flooded 16 times; repairs have totaled $807,000, seven times the market value of the property. Yet very few of these owners have lost their policies or seen their premiums go up substantially.
This is a case of good intentions gone wrong. Created by Congress in 1968 to reduce spending on disaster relief and discourage development in high-risk areas, the NFIP requires homeowners in flood-prone areas who have federally insured mortgages (that includes the vast majority of housing loans) to buy government-sponsored flood insurance. The program also includes incentives designed to persuade flood victims to rebuild on higher ground.
The NFIP never worked. Even today, many homeowners avoid buying flood insurance. Efforts to coax more buyers into the system have led to artificially low premiums. And the government has relied on laughably outdated flood maps, many of them decades old, to determine eligibility for insurance, further distorting the costs of the program.
As a result, policyholders now pay about $400 for every $100,000 in coverage (up to $250,000 for a house, plus $100,000 for belongings). You're definitely not going to get that deal from your insurance agent.
Like its parent agency, FEMA, the NFIP has been rocked in recent years by a succession of storms, especially Hurricanes Katrina and Rita in 2005, leaving the program $17 billion in debt. So what began as a way to limit relief costs has become a very expensive bailout. In fact, by providing coverage at low rates in areas where private insurers are unwilling to operate, the NFIP has caused what it was intended to stop-development in danger zones. "By subsidizing flood insurance, we're encouraging more people to live in harm's way," says Steve Ellis, vice president of Taxpayers for Common Sense, a budget watchdog group. "Not all of us can have a water view, but all of us get stuck with the tab."
Read FEMA's response to Michael Crowley's column.
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