Insurance rates are subsidized, saddling taxpayers with a big bill.
The terrible unfolding disaster in Houston in the wake of Hurricane Harvey is turning the spotlight on our national system of flood insurance.
And what a mess it is.
You’d think that with so many people living in so many coastal areas, we’d have this one covered. And you’d think the Federal Emergency Management Agency’s National Flood Insurance Program would be state of the art.
Here’s what politicians don’t want to tell you.
1. Government flood insurance is massively subsidized. So much remains unclear about the situation in Houston, but one thing is already certain: The rest of us are going to be cutting yet another giant check to cover the damage. The reason? The National Flood Insurance Program sells its policies on the cheap as a giveaway to voters — excuse me, citizens — in coastal areas. Even before Hurricane Harvey, the program owed Uncle Sam $25 billion. It hasn’t even paid off the loans from Hurricane Katrina — and that was 12 years ago.
2. It creates its own problem. Cover people with cheap flood insurance and you make it more attractive to build in flood zones. No wonder so many people have, congregated along coastal areas. And that, in turn, creates more risk. As Munich Re, a reinsurance company puts it, “the U.S. National Flood Insurance Program (NFIP) shows how government subsidies over decades result in insufficient insurance coverage, incentives to build in highly exposed areas and multibillion-dollar deficits.”
3. It’s going to get worse. “Risks posed by coastal storms are increasing, both to people and to property,” warned the National Research Council in 2015. The National Oceanic and Atmospheric Administration says global sea levels are probably going to rise somewhere between one and three feet this century. Other aspects of climate change, such as warming seas, can make storms more likely as well. Rising sea levels mean more floods. “We are seeing a pattern of more frequent, more severe flooding events,” says Tom Santos, vice president for federal affairs at the American Insurance Association.
4. The program is already on the hook for $1.24 trillion in total risk from floods. And by “the program,” of course, I mean, “us.” That’s five million homes at around $500,000 a pop. Yet the premiums being charged total just $3.5 billion a year.
5. Many who should have insurance are uncovered. Studies suggest up a third of homeowners who are required to take out NFIP policies haven’t done so. And there are many millions more who should have flood insurance but aren’t required to. Real-estate analytics company CoreLogic estimates that more than half of Houston homes at risk of flooding were outside the federally-mandated flood insurance areas.
6. Congress is shutting down NFIP’s overdraft facility next month with no real plan. On Sept. 30, NFIP’s debt limit with the Treasury will be cut to just $1.5 billion. Did I mention it currently owes the govenment $25 billion. So the debt will just vanish? Like magic!
7. The insurance is full of holes too. Even if you have a policy, it won’t cover the cost of rehousing you, or the costs of business interruption. In most cases it won’t cover mudslide damage. After every disaster inspectors find severe underpayments; after Hurricane Sandy, they found these came to at least $189 million.