Congress is considering changes to the National Flood Insurance Program (NFIP) as well as increasing the availability of state-sponsored insurance funds.  Both initiatives would expose taxpayers to massive costs.

The Flood Insurance Reform and Modernization Act of 2007, H.R. 3121, reauthorizes the NFIP for five years, increases NFIP borrowing authority, and makes updates to maximum insurance limits.  The bill includes multi-peril coverage under the NFIP for the first time.

According to the Congressional Budget Office, the NFIP currently has a deficit of $17.5 billion.  That will increase by an average of $900 million per year, depending on the level of flooding.

The multi-peril section of H.R. 3121 is intended to eliminate the need for property owners to distinguish wind damage from flood damage.  Objections to this provision were raised by consumer, taxpayer, insurance and environmental groups, as well as the administration.  According to a Towers Perrin study, if the NFIP provides wind coverage for all eligible personal and commercial properties, replacing the entire private market, there would be reasonable potential for the program to generate deficits of $100 to $200 billion.

The second flood insurance bill, the Homeowners’ Defense Act of 2007, H.R. 3355, would expand the government’s role in disaster insurance coverage.  The government would be usurping the marketplace and acting as a primary insurer.

Florida started down this path in January 2007, by allowing the state-run Citizens Property Insurance Corporation to compete with private insurers for primary insurance coverage.  Citizens has lower premiums because of an implicit taxpayer guarantee and unsound actuarial assumptions.

On April 20, The Wall Street Journal called Citizens an “exercise in Cuban economics [that] is already gutting Florida’s once-competitive insurance market.”  Private insurers are leaving the state, canceling policies, and restricting the issuance of new policies.

Instead of spreading the risk of a disaster throughout the insurance industry, Florida is putting all of the risk on taxpayers.  A Towers Perrin study found that every Florida household could be hit with a $14,000 bill in the event of a major hurricane because Citizens does not have the reserves necessary to provide coverage in such a disaster.

A recent report by Justin R. Pidot, a Fellow at the Georgetown Environmental Law and Policy Institute, calls pending congressional proposals to address coastal insurance rates “misguided” and suggests that “the best federal policy appears to be the one that does the least, that is, that largely leaves the business of providing insurance for hurricanes and other coastal storms to the private sector.”

For the sake of the taxpayers, members of Congress should restrain themselves from throwing money to solve a perceived problem of normal marketplace disruptions to assist homeowners in disaster-prone areas.  Instead, Congress should get out of the way of the private insurance markets.

- Alexa Moutevelis