R Street Institute: Dorian Is Urgent Reminder of Need for Flood Insurance Reform

As the U.S. Southeast braces for the impact of Hurricane Dorian, it is urgent that Congress get serious about reforming the National Flood Insurance Program (NFIP), according to the R Street Institute.

Source: R Street Institute | Published on September 5, 2019

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Created by Congress in 1968, the NFIP has been the primary source of insurance coverage for flooding over the past 50 years. While it continues to fill an important role in insurance markets, the program's subsidies and mispriced risks distort those markets and discourage the emergence of private alternatives, argues R.J. Lehmann, R Street's director of finance, insurance and trade policy.

"The NFIP is unsustainable as currently structured, having borrowed nearly $40 billion from taxpayers in recent years with no feasible prospect to ever repay any of that total," Lehmann said. "Moreover, because the rates it charges do not accurately account for the risk of flooding, it serves to encourage more development in highly risk-prone and environmentally sensitive regions."

The House Financial Services Committee passed reform legislation in June that makes significant improvements to the program's maps, invests in mitigation and ensures affordability for low-income policyholders. However, the bill has yet to be taken up on the House floor and the Senate has not yet moved any legislation.

With members set to return next week from August recess and with less than a month until the NFIP's statutory authorization is set to expire, NFIP reform must be at the top of the agenda. It is essential Congress move a reform package that removes perverse incentives and addresses severe repetitive loss properties, which comprise just 1 percent of the NFIP's 5 million policies but account for between a quarter and a third of all its claims.

"Properties that experience more than $1 million in aggregate flood damages - the equivalent of three to four complete losses - should no longer be eligible for NFIP coverage. The NFIP also should be barred from writing any coverage for new construction in 100-year floodplains," Lehmann said. "As some begin to ponder whether the threats of climate change and rising sea levels will require a managed retreat from the coasts, the least we can do is to remove any incentives that make the problem even worse."