The many natural disasters over the past several years have put the spotlight on another disaster, the government’s attempt to protect us from them. The National Flood Insurance Program (NFIP) is in an $18 billion debacle and tax payers have been stuck with the bill. The Biggert-Waters Flood Insurance Reform Act was passed in 2012 in an effort to address this issue and salvage the NFIP. The main point of controversy is that this legislation has caused dramatic and sudden increases in the flood insurance premiums for some homeowners.
In typical government fashion, the NFIP was started because someone thought it was noble for everyone to have to protect their neighbors from disasters. Rather than operating based on profitability, the program operated based on the idea that people should have insurance. A familiar concept in the legislative world, but a misguided one with terrible unintended consequences.
It turns out that the NFIP was not always charging premiums based on actual risk, effectively subsidizing almost 1 in 4 of properties that were considered “high risk.” The subsidies created incentives to build and buy in high flood risk areas.
Obviously, this is not a sustainable way to run an insurance program, and the prices for everyone are skyrocketing.
“I built to their codes. I did everything I was supposed to do,” says one homeowner. The New York Times reported that this man’s flood insurance premium is likely to jump from $412 to over $6500 per year. That’s roughly a $500 per month increase on top of his monthly mortgage!
Most flood insurance policies are written through a program called Write Your Own (WYO), in which “private” flood insurance companies are paid to write and service flood insurance policies for the NFIP. This is a sweet deal for the insurance companies, which are able to get the profit without the risk. The system wasn’t such a great deal for the homeowners, who often didn’t even know their policies were subsidized.
Most people were just purchasing flood insurance as banks are mandated to require them to do. Government loves to get businesses to do its dirty work. Because of the mandate, many homeowners cannot simply opt out of flood insurance coverage and hope for the best. Instead they are forced to pay the premium or give up their home. Even selling is not a great option in this situation, since the increased flood premium will certainly impact the value of the property.
If the government will stay out of the way, private insurers might actually be able to provide some relief for homeowners. A less regulated form of insurance called surplus lines insurance is offering to provide the same level of insurance at a much lower cost than the NFIP for some properties. However, there will still be properties that should have never been insured in the first place and are just too risky to insure. Although flood insurance subsidies are being phased out, the problems they have created are not going to go away overnight.