Flood Insurance Reform Needed In Wake Of Historic Storms

Steve Pociask President, American Consumer Institute
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The devastating flooding in South Carolina underscores the urgent need for policy reforms that can reduce the risks of floods and other disasters. While Congress must provide emergency relief to help the people of South Carolina today, lawmakers should also look at long-term changes that can combat the growing threats Americans face from natural disasters.

South Carolina’s floods are far from the only extreme disaster to hit the United States in recent years, and they won’t be the last. But despite the fact that large-scale disasters are becoming more common, our approach to disaster response has not fundamentally changed. Today, we still wait to respond to floods, hurricanes, and other storms after they have passed, rather than taking more time out beforehand to mitigate the scale of the damage. This puts consumers, businesses, property owners around the country and taxpayers at risk.

Our problems start in the National Flood Insurance Program (NFIP), the federal program that covers policies for millions of Americans in flood-prone regions. The program offers rates to policyholders that do not match the true flood risks they face, giving little incentive to stormproof, elevate homes and take other necessary steps to reduce the impact of storms.

As a result, the NFIP is in critical condition, straining under $23 billion in debt that puts its future in jeopardy. Without reform, the program could be completely wiped out by the next multibillion-dollar storm.

Congress has tried to raise the NFIP’s rates to accurately reflect risks, only to face opposition from those who have long grown accustomed to cheap, subsidized coverage. Studies have shown that these subsidies disproportionately benefit wealthier Americans, who can better afford to insure their beachfront homes.

Instead of trying to fix rates again, Congress could simply involve private insurers in the sale of flood insurance. Flood-prone states across the country have begun taking this approach, loosening restrictions that have kept private insurers from entering the market. Following their lead, federal lawmakers have introduced a bill that would lift such restrictions nationally, allowing private providers to cover holders of federally-backed mortgages, which are by far the most common type of property in the NFIP.

Private providers can react faster to changing climate and flood conditions, permitting them to offer rates that are closer aligned to risk, and then there are benefits to price competition, which will keep rates affordable. Competitive entry could move the NFIP to finally provide rates that reflect the full spectrum of flood risk, making it easier for individuals and towns to prepare for the worst.

Earlier this year, FEMA, which oversees the NFIP, recommended the private sector play a greater role in flood insurance. Specifically, the agency suggested the NFIP look into purchasing reinsurance, a tool used by many insurers to cushion the blow of individual disasters. Reinsurance would let the NFIP better spread its risk, reducing the likelihood that a disaster, like the one in South Carolina, could take down the program altogether.

Mitigation is also an important policy tool because it establishes appropriate standards that could better harden infrastructure, elevate homes and require stronger building codes, thereby leaving communities more prepared in the face of a storm.

Disaster policy reforms like these can save Americans from the despair and heartache of recovery. As we consider how to move forward, changes to the National Flood Insurance Program and other recovery programs must be a part of the conversation. We owe it to all families in South Carolina to prevent a repeat of this disaster.

Stephen Pociask is President of the American Consumer Institute Center for Citizen Research, a nonprofit education and research organization. For more information about the Institute, visit www.theamericanconsumer.org or follow me on Twitter @ConsumerPal.