The National Flood Insurance Program Is Subsidizing Millionaires
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.
When setting premiums, the NFIP often relies on outdated flood maps which no longer reflect true risks. In addition, premiums are determined based on average historical losses within certain risk-based categories, which fails to capture property-level nuances. And it’s not that more sophisticated modeling isn’t available — the private sector has been using it for years.
But that’s not all. In addition to failing to set premiums accurately, the NFIP offers a significant proportion of policyholders — about 22 percent, nationally — heavily subsidized rates, leaving these homeowners to cover only 55 to 60 percent of the full-risk premium.
And while it might be reasonable to expect these subsidies to go to low-income households, the reality is very different.
Government watchdogs have long observed that the NFIP’s subsidies overwhelmingly support high-income coastal residents. According to the American Action Forum, “the NFIP in effect transfers wealth from the taxpayers to communities along the Gulf Coast, and especially to upper-income homeowners residing there.”
The Government Accountability Office’s independent analysis found that most of the subsidies go to homes with the highest values, meaning that federal taxpayers are funding handouts to the wealthiest homeowners who could easily shoulder the full cost of flood insurance. Nearly 80 percent of households who receive NFIP subsidies live in counties that rank in the wealthiest quintile.
In addition, nearly one-quarter of subsidized coastal properties are not the policyholder’s principal residence. Since coastal properties attract wealthy homeowners, especially those looking to purchase vacation homes, it’s no surprise that dwellings in flood-prone areas tend to belong to higher-income households. The real question is why the government persists in subsidizing these flood risks.
Nor is this a new phenomenon. In 2007, the Congressional Budget Office examined a sample of 10,000 properties covered by the NFIP and found that “40 percent of subsidized coastal properties in the sample are worth more than $500,000; 12 percent are worth more than $1 million.” By comparison, the national median value of a house was $160,000 at the time.
If Congress wants to save the NFIP, a good place to start would be to end subsidies to homeowners who don’t need them, and to allow private flood insurers to serve this market.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow @ConsumerPal.