Flood insurance welfare for the rich

Steve Pociask President, American Consumer Institute
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In 2012, Congress passed the Biggert-Waters Reform Act, which was designed to take the financially troubled National Flood Insurance Program (NFIP) and set it on a path toward solvency by reducing flood insurance subsidies for homes located in flood-prone areas, including subsidies for vacation homes owned by beachfront millionaires. Now those flood reforms could be washed away, leaving taxpayers and other consumers to foot the bill – essentially perpetuating a subsidy for the rich.

Recently, the Senate passed a bill that would push higher costs to taxpayers by imposing a four-year delay in reducing subsidized flood insurance rates. Now the House is proposing an even more drastic change that would gut sections of the 2012 reforms, thereby allowing subsidies in perpetuity, as well as imposing new fees on less flood-prone homes in order to subsidize homes located in the highest flood areas. Because homes located in the highest flood areas tend to be owned by the wealthiest, the new subsidy is tantamount to helping the rich at the cost of taxpayers and less wealthy consumers.

It seems like Congress has forgotten why the program needed to be fixed in the first place. As a reminder, the government-run flood insurance program sets rates below actual and prospective costs, which explains why its books stood $19 billion in debt in 2012 and now stands at $24 billion. These below-cost rates produce losses that taxpayers and other consumers must fund, and they encourage building in paths proven most susceptible to storm damage and the loss of life.

Not only does the program put taxpayers and some homeowners at risk, but it encourages a cycle of waste. After a flood, shore-side and riverside owners rebuild in the same path of risk using the proceeds from the subsidized flood program.  One $70,000 home accounted for 34 claims totaling $668,000 over a 32-year stretch.  Only by setting flood insurance prices closer to risk can this cycle of waste be broken – and that is what the 2012 reforms were designed to do.

Continuing with the 2012 reforms is urgent. The General Accountability Office (GAO) reported that 22 percent of homes with NFIP protection pay premiums that are so subsidized that they cover only 40-45 percent of risk-based costs. According to another GAO report to Congress, most of the subsidies go to homes with the highest values.  In other words, the program provides most of its subsidies to the wealthiest of homeowners at the cost of everyone else. This means that the proposed House and Senate solutions are beachfront millionaire bailouts.

By subsiding properties, the NFIP encourages development in flood-prone areas, thereby putting more property and lives at risk, as well as raising prices for all.  The program encourages development along national storm barriers, increasing the probability of storm damage, which further fuels higher costs for consumers and taxpayers.

The House bill goes further by requiring homes in less flood-prone areas (typically owned by less wealthy consumers) to pay a fee to support those in the most flood-prone areas (typically the wealthiest). It is welfare for the rich.

Government-run insurance schemes pose a big insolvency problem for consumers and taxpayers. Risk-based pricing is the fairest and most workable solution to fixing the problem. The 2012 reforms are good solutions because they work to close the gap and set rates closer to flood risk. However, the Senate and House proposals would gut these reforms, encourage more coastal development, and continue the subsidy for coastal millionaires.

Let’s end this wasteful government farce. Let the 2012 flood insurance reforms continue.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research