When Congress created the National Flood Insurance Program (NFIP) in 1968, its goal was to provide affordable insurance to help communities rebuild after flooding. In the years since, the program's finances have gone from bad to worse, and it now stands out as a model of flawed design and financial mismanagement. The program loses about $1.4 billion each year, and its debts exceed $20 billion, which no analyst believes it will ever pay back. In the aftermath of Hurricane Michael, something needs to be done.
While policy experts disagree about what exactly should be done to put the NFIP on a sustainable trajectory, there is universal agreement that one of the program's biggest flaws is that premiums are not adjusted to reflect covered risk. The NFIP often underprices policies, distorting homeowners' incentives and encouraging over-development in flood-prone areas. On the other hand, some property owners face premiums that are needlessly inflated, making it less attractive to buy coverage.
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