Flood Insurance Still Soaks the Taxpayer

In early July, politicians in Washington, D.C. missed an opportunity to improve the failing National Flood Insurance Program (NFIP) when Congress passed another short-term reauthorization that expires on September 30, 2010.  A second bite at the apple was even more misguided when on July 15, 2010, the House passed H.R. 5114, the Flood Insurance Reform Priorities Act, a five-year reauthorization of the NFIP, which expanded the program.

Proponents of the NFIP argue that the program is necessary because it adds certainty to real estate markets that are susceptible to storms and flooding.  While this may be the case, it also brings a huge amount of liability to taxpayers. 

According toa recent analysis by House Republicans, the NFIP is the largest single-line property insurer in the nation and provides coverage for five million policy holders, who reside in communities that are deemed risky enough to receive federally subsidized insurance.  In total, taxpayers are liable for $1.2 trillion in potential claims.  The program has already accumulated $18.75 billion in debtto cover past claims.  The Federal Emergency Management Agency (FEMA), the agency tasked with administering claims,currently owes this money to the Treasury.  The analysis further concluded that, “According to the Congressional Budget Office (CBO), it is unlikely that the NFIP will pay this debt and will exhaust its remaining borrowing authority.  The NFIP is currently authorized to borrow up to $20.775 billion.” According to CBO it has been deemed unlikely that the NFIP program willever be able to repay its debt to taxpayers.

House Republicans estimated that H.R. 5114 would increase spending by about $378 million over the next five years.  It is fiscally irresponsible for Congress to reauthorize a program without improving its fiscal outlook.

The NFIPhas been included on the Government Accountability Office’s (GAO) list of high-risk government programs since 2006, which means itisin need of comprehensive reforms.  A June 2008 GAO studyfound structural shortcomings in the NFIP program, which included the disastrous financial condition of NFIP,FEMA’s failed efforts to alleviate losses, and the program’s inability to monitor contractors.A program like this should not havesuch defects, particularly when taxpayers are on the hook for past claims and enormous future liabilities. 

One of the worst problems with the NFIP program is repeated claims.  According the June, 2008 GAO study, “The extent of claim payments attributed to repetitive loss properties (those with two or more claims in a rolling 10-year period) increased from 1997 through 2006, from $3.7 billion to nearly $8 billion.”Taxpayers should not be expected to pay repeated insurance claims in areas known to be at risk for damaging storms.

When revisiting programs like the NFIP, Congress should protect the taxpayers’interests. Instead of forking over truck loads of money whenever there is a large storm, a better course of action would be to reform the NFIP program.  Unfortunately, politicians in Washington, D.C.squandered severalopportunities to reform a program that is both costly and structurally deficient. Instead of looking for ways to create more free market-based competitive insurance markets that support high-risk property insurance, members of Congress used the most recent opportunity to expand the NFIP program byincreasing liabilities and ensuring that taxpayers will never be made whole again.  Actions like these illustrate why “fiscal accountably” is missing from the vocabularies of most politicians.

  — MacMillin Slobodien