Flood Insurance Premiums Are Too Low
A report released by the Government Accountability Office(GAO) states that flood insurance premiums doesn’t adequately reflect risk.
The 2005 hurricanes left the NFIP with an “unprecedented” $17.4 billion deficit, the GAO says in a report recently submitted to the U.S. Senate Committee on Banking, Housing and Urban Affairs. The report, “FEMA’s Rate-Setting Process Warrants Attention,” summarizes the findings of a study undertaken in response to concerns over the financial status of the NFIP, which is operated by the Federal Emergency Management Agency (FEMA).
Really, no kidding, it’s been quite obvious since Hurricane Katrina that flood insurance premiums are too low. There’s a reason why there isn’t a private market place for flood insurance and it’s because private insurers can’t compete with the government’s program, not and make money at the same time.
A combination of outdated flood maps and subsidized insurance for low income families has proven to be a double whammy for the struggling NFIP. The Army’s Corps of Engineers is currently re-mapping flood zones but it is a timely process which is expected to take years and cost millions of dollars.
All things considered it could actually be much worse, however, participation in the NFIP has always been absurdly low, one study found that only 17% of homes have flood insurance. There is a difference of opinion as to whether greater participation would mean higher losses for the program or whether it would be enough to spread the risk sufficiently.
For months Congress debated on the future of the controversial program but in the end could only agree on an extension. The next Congressional session will have to decide whether it will add wind coverage or forgive the NFIP’s existing debt which were the main bones of contention.
No matter how you look at it, high risk flood areas are being subsidized by the American taxpayer. It also promotes development in these areas which could increase the NFIP’s risk profile in over time.
If this were an actual company it would have gone bankrupt already. The government will have to decide whether it will keep going on this path or revamp the premium structure to at least give the program a chance to break even.
