Federal Flood Insurance Causes Natural Disasters

Sept. 26, 2008

U. S. government flood insurance causes natural disasters.

How can I say that? Obviously flood insurance can't cause hurricanes or make a river overflow its banks. But hurricanes and rivers overflowing their banks aren't in themselves disasters. Only when people are very adversely affected by these events do most people consider them disasters, and federal flood insurance encourages people to build in harm's way.

The reason federal flood insurance came into existence is because people were complaining that flood insurance issued by private companies was way too costly and unaffordable. But there may have been a very good reason why private flood insurance was so expensive.

The only way for insurance companies to make any money is by the premiums people pay for insurance. The insurance companies also make money off investments, but the money for those investments comes from the premiums people pay for insurance. So the insurance companies absolutely want to sell you insurance so they can get those premium payments and make money. But the money they receive as premiums and make on investments must be greater than the amount they pay out for claims, otherwise they lose money. Consequently, these companies price their insurance so that the premiums cover all expected claims plus a reasonable profit. But the profit can't be too much, otherwise they can't compete with other insurance companies and their cost will be too high and discourage sales of policies.

That is why private flood insurance is so expensive. Data from past flooding indicates that properties in low lying areas are at great risk of being flooded and filing large claims. Also, most of the cost of hurricane losses is due to flooding, not wind damage. So these companies price their insurance accordingly. These high prices for flood insurance should be a very strong message that these properties are a very high risk for flooding.

But many people don't want to face reality. So they complained about high flood insurance rates. Many legislators, in an effort to win votes, responded to this consumer outcry and, probably more important, to special interests groups like builders, realtors, mortgage companies, and local government officials, and created a federal flood insurance program to provide more reasonably priced, at least in the consumer's eyes, flood insurance. The problems with this are:

1) The premiums for federal flood insurance don't come close to covering the flood claims. This shortfall must be made up with general tax revenue. As a result, every taxpayer is subsidizing property close to the waterfront for a small portion of the population. This also increases our federal budget deficits.

2) Since flood insurance is now much more affordable, people become complacent about the flood risks for their property. This leads to a great increase of people living in harm's way. And, if global warming is real, this problem is only going to become worse as the sea levels rise, with many of these properties becoming permanently underwater.

Consequently, federal flood insurance should be abolished. But, with so many people who presently depend upon this insurance, we can't just outright discontinue it. We must somehow grandfather in all those who presently have federal flood insurance while somehow reducing the number of policies out there. I therefore suggest the following:

1) Federal flood insurance will not be available to any new properties that weren't previously covered by federal flood insurance.

2) If the federal flood insurance policy lapses for any reason, that property will no longer be eligible for federal flood insurance. This makes it imperative that the property owner or the mortgage company make sure the federal flood insurance premiums are always paid if they want to keep the property eligible for federal flood insurance. Existing federal flood insurance policies can be transferred to a new property owner during sales of the property, as long as no payments are missed.

3) If a claim is filed against a federal flood insurance policy, the government will pay the claim, but the property owner must relocate and surrender the property to the federal government. This property will no longer ever be eligible for federal flood insurance. Ideally, it should no longer ever be available for private development, either.

There is a past precedent for the last suggestion. In 1972, many properties in Pennsylvania were severely damaged by the flooding of the Susquehanna River as a result of Hurricane Agnes. In 1975, many of these same properties were severely damaged again when the Susquehanna flooded again. After this second flood, many of these damaged properties were condemned and confiscated by the local governments after suitable compensation to the property owners. I don't know if this was a local initiative or was funded at all by the federal government. Most all of these properties have since been converted to parks, boat ramps, wetlands, wildlife refuges, youth sports fields, etc. Subsequent flooding of the Susquehanna hasn't had as severe an impact, though there are still some losses of homes, since not all communities participated in the 1970's program to condemn and confiscate flooded properties.

(Disclosure: One of the homes damaged by these two floods belonged to my one grandmother. She was also one of the few who fought the eviction and relocation efforts. Most people were happy to receive any money for their properties, since most of these damaged properties had little remaining resale value. She died a couple years after the 1975 flood and her home was then confiscated. The property has since been part of a public park.)

Those who don't want to be forced to relocate after a flooding claim can always drop federal flood insurance and get private flood insurance. But they will probably have much higher, and probably more realistic, insurance premiums.

An exception to the above suggestions may be government employees, such as park rangers, researchers, Coast Guard and military, law enforcement, etc., who are force to live in low lying areas because of their jobs. Many of these people probably live in government housing anyway.

We may also have to make an exception for seafood industry workers. Large companies can handle the flood insurance issue as part of their cost of doing business. But most fisherman, shellfish harvesters, etc., are self employed or work for very small companies and are barely getting by financially. We may need to work out some alternative plan if we expect to have a viable seafood industry. An alternative is much higher costs for seafood and tariffs on imported seafood to even the playing field for seafood from countries with lower insurance costs.

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