Congress apparently didn’t kick the flood insurance can hard enough in September. It only bounced as far as Dec. 8, so by Friday the can will probably get another kick.
The House this month passed the 21st Century Flood Reform Act, a long-term reauthorization, but even a revised Senate version is unlikely before the program expires this week. Legislators probably will extend the program and give themselves another six months to a year to fix the failing National Flood Insurance Program.
The problem is easily stated. Even before this year’s costly hurricanes in Houston and Florida, the program was $25 billion in debt – having paid out in claims that much more than it had received in premiums for insurance. In October, Congress and taxpayers spent $16 billion to bail out the NFIP temporarily.
There are no painless solutions, and deciding on one is especially difficult because it isn’t subject to bipartisan compromise. Flood insurance pits coastal legislators against their inland peers, and the real estate and construction industries against environmental and taxpayer groups.
Rep. Frank LoBiondo worked hard to defend his coastal constituents. He and coastal congressional allies got the House bill amended in favor of flood-zone property owners – eliminating past claims in figuring when to raise insurance costs for properties with too many claims; allowing new coverage for structures with high replacement costs; and raising the coverage cutoff from claims worth twice a property’s value to three times.
Coastal property owners and their representatives, powerful as they are, seem unlikely to prevail in the long run. People not along a coast are starting to realize they’re paying so others typically better off can live there. A Chicago Tribune editorial last week, for example, noted that houses near Houston and in Louisiana have been rebuilt with NFIP money dozens of times at costs six to 20 times the actual value of the houses.
More than $1 trillion of property at risk is insured through the National Flood Insurance Program. Much more is not part of the program. On the East and Gulf coasts alone, there is an estimated $64 trillion in properties at risk. Nearly all, then, aren’t insuring against flood, but counting on government aid when disaster strikes.
Providing disaster relief, like any help for people in desperate need, is great, and the capacity to do so should be preserved. Unfortunately, government subsidized insurance and disaster relief also encourage people to put themselves and their buildings where they are sure to eventually suffer desperate need or worse.
The flood insurance program may seem like the toughest nut to crack right now, but just wait until one of the known and inevitable major earthquakes devastates a highly populated area. Imagine the coming fight over rebuilding San Francisco.
This consideration of moral hazard – when policies encourage behavior that should be discouraged – also might apply to areas prone to wildfires or tornadoes. Drawing these lines and changing incentives looks unimaginably difficult but perhaps inevitable.
Flood insurance reform by comparison should be relatively easy. Yet when Congress reached what it considered the major reform needed in 2012, politicians lost their nerve and a year later put off the increases in policy premiums – setting up the financial collapse of the program today.
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