Study: Flood insurance subsidies poor policy

Posted 1/3/12

WASHINGTON – On Dec. 23, President Barack Obama signed an appropriations bill that extended the current National Flood Insurance Program through May 31. It is a program that currently has an $18 billion deficit, largely the result of $17 billion in claims from the 2005 hurricanes Katrina, Rita and Wilma.

Economists Ike Brannon and Elizabeth Lowell argue in a Cato Institute paper, “The Flood Insurance Fix,” that the federal government has for too long been subsidizing the flood insurance program in ways that encourage development in flood-prone, environmentally sensitive areas, and that especially in the case of flood insurance for vacation homes near the coast, the program acts as a wealth transfer to the well-off.

While the two authors admit that letting the premium levels for the insurance program rise to their natural level would likely decrease the number of people participating in the program at all, they advocate that the government do a better job of identifying flood risk as well as allow flood insurance premiums more accurately reflect the actual cost of insurance.

Brannon and Lowell note that both House and Senate reauthorization bills make a good stab at reforming the program and “hew close to the guiding principle that citizens, and not the government, should vear the risk they take for living in high-risk flood zones.”

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