Should Taxpayers Subsidize Property Owners in Flood Areas?

2011 Minot ND Flood

2011 Minot ND Flood, Source: FEMA

In the past year, the Federal Emergency Management Agency (FEMA) reports that there have been 66 declared flood disasters in America.  That works out to an average of 5½ flood disasters a month.

Some of those disasters were associated with tornadoes, mudslides and strong winds, and they ranged from Puerto Rico to Alaska, and California to Maine, but most were simply predictable heavy rainfall leading to rivers and streams overflowing their banks.  For the most part, these are not Hurricane Katrina “once-in-500-years” events.  In fact, most of the floods are fairly predictable because the same area has been flooded in the past, and some precautions have been taken to reduce the severity of flooding in the future.  These people knew there was a risk of being flooded, and they decided to take the risk. (Note: This isn’t true of some flood events, like hurricanes.  One estimate shows that the majority of properties at risk from flooding due to Hurricane Irene are not located in FEMA flood zones, but that doesn’t apply to most floods.)

In part, economists think people take the risk because they know that any benefits coming from locating there will come to the private property owners and costs will be absorbed by the taxpayers.  In economic terms, they have privatized the profits and socialized the losses.

Should the public continue to subsidize this behavior?

These floods cost billions of dollars, as well as killing and injuring many people, including rescue workers trying to save the property owners and residents who are endangered when it does flood.  And a lot of those costs are paid by the taxpayers.  Private insurance companies provide almost no flood insurance, because the insurance industry recognizes the huge risks.  Instead, FEMA, which operates the National Flood Insurance Program (NFIP), provides the overwhelming majority of all flood insurance.  (Most of the private insurance companies that do offer flood insurance are really agents for the NFIP.)

And the NFIP is broke.  In fact, FEMA’s NFIP owes the Treasury nearly $18 billion, and is nearing the Congressional cap of $20.8 billion––which was raised after the hurricanes of 2005 “broke the bank.”  Early estimates are that Hurricane Irene may add another $10 billion losses to the already astronomical cost of flooding in the last 12 months.  And that is causing severe heartburn in the Capitol.

One of the reasons for that is that insured property owners may only pay $600 a year for coverage from NFIP (or as little as $129 if they get the subsidized rate), and the average claim is $34,000.  That means there would have to be about 60 insured parties (paying the unsubsidized rate) for every claim for the system to break even.  And yet, it is reported that in all of Vermont, one of the states hardest hit by Hurricane Irene, there were only about 3,700 flood insurance policies.

Of course, payments from the NFIP are only a small portion of the total cost of floods.  First, most property owners do not have flood insurance, from NFIP or any other source.  There are also public costs associated with damages to roads, bridges, water and sewer systems, power systems, and the costs of deploying the National Guard and other emergency personnel.

The NFIP is supposed to be self-supporting, with property owners paying premiums to buy insurance, but over one-fifth of the policy holders receive premium subsidies of 40-45 percent. And that subsidy is encouraging more people to move into dangerous floodplains, despite the risks.

The bottom line is that the taxpayers subsidize the development of property located in known floodplains.  And that raises the question of whether that subsidy is good public policy, or whether the whole approach to flood emergencies should be changed.  Would we all be better off if we ended the NFIP and instead provided short-term subsidies to floodplain property owners to move out of the danger zone, avoiding the inevitable loss of property and lives that occur so predictably along the nation’s waterways?

At the very least, it seems that FEMA should end subsidizing the NFIP premiums for any insured property owners.  And it may be a good idea for the states (which control land use) to prohibit construction within floodplains, or require any owner of property located in a floodplain to carry insurance to reimburse public agencies for emergency services when floods do occur.  Just as property owners in high wildfire risk areas must pay for protection against fire damage, those who are known to take the extra ordinary risk of being flooded and needing rescue or other emergency services should be required to pay for those services, which will not be needed by all members of the community.  (Currently, some property owners are required to buy flood insurance, but only if they borrow mortgage loans from federally regulated lenders.  And, if property is flooded, the owner can still obtain insurance coverage after rebuilding, leading to repeat claims.)

So, what it finally comes down to is whether insuring people against their own choices is an appropriate role for government:

Should the public at large––the taxpayers––continue to pay to rescue people who take the risk that they won’t be flooded by the next big storm?

Or should the subsidy end?  Should NFIP insurance premiums be raised to levels that would fully cover the risk (in which case many more property owners would choose to drop their insurance, because they couldn’t afford it or just believe that it isn’t worth the cost)?

Or should the people who choose to live in dangerous places like floodplains be required to reimburse the taxpayers when the inevitable emergency happens, when the local, state and federal governments spend millions, sometimes billions, of dollars to rescue those endangered and repair the damage?

Should the whole idea of public insurance against disasters be abandoned, as some are proposing?

Or is this kind of sharing of risk one of the reasons we have governments?

There are good arguments on both sides of the debate. What do you think?

7 replies
  1. Tim O'Connell
    Tim O'Connell says:

    Unless Congress acts in before the end of September, this will become a moot point, because the authority for the National Flood Insurance Program, for any property, whether subject to regular flooding or only flooding during extreme weather events, will expire. The stop-gap spending bill proposed by the House GOP would extend the NFIP for two months, but not resolve the underlying issues.

    What the impact of ending flood insurance will be is open to speculation, but it would certainly affect thousands, if not millions of property owners and businesses damaged by flooding every year.

    Should the program be ended or reformed? And should a program to help victims of emergencies be operated on a national, state or local level?

  2. dean r
    dean r says:

    this is a conundrum due to the fact that even tho i opt to buy flood insurance because i live in a earthquake potentially dangerous area (CA.) below a dam.(shasta dam) that may break due to earthquake damage and flood my property, it would be determined to be flood damage. i am not on a designated flood plane and dont have a mortgage that requires flood why am i paying into a federal program (FEMA) that is bankrupt causing questions of coverage should i indeed incur a loss. these, among many other issues are not being addressed by the federal govt that has the sole responsibility running this program. another Fed. boondoggle i see.

  3. toconnell
    toconnell says:

    The Federal agencies most involved with housing finance have posted some items of interest on this subject:

    Agencies Release Guidance and Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance

    WASHINGTON – The federal agencies that supervise banks, thrifts, and credit unions, and the Farm Credit System, today published guidance that updates the Interagency Questions and Answers Regarding Flood Insurance that were most recently published on July 21, 2009 at 74 FR 35914-35947.

    The guidance finalizes two questions and answers that had been previously proposed. The first relates to insurable value. The second relates to force placement of flood insurance. The agencies withdrew another question regarding insurable value.

    The agencies request comment on three additional proposed updates to questions and answers relating to force placement of flood insurance. Two answers have been significantly and substantively changed. The third change, regarding force placement of flood insurance, revises a previously finalized Question and Answer for consistency with the proposed changes.

    It is the intention of the agencies that, after public comment has been received and considered and the guidance has been adopted in final form, the agencies will issue a final update to the 2009 Interagency Questions and Answers Regarding Flood Insurance. The final update will continue to supplement other guidance or interpretations issued by the agencies and the Federal Emergency Management Agency.

    The agencies invite comment on the proposed changes to the Interagency Questions and Answers Regarding Flood Insurance and, more generally, on other issues and concerns regarding compliance with the federal flood insurance statutes and regulations. Comments are due 45 days after publication in the Federal Register, which is expected shortly.

    Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance – PDF (PDF Help)
    Media Contacts:
    Federal Reserve Susan Stawick 202-452-2955
    FDIC Greg Hernandez 202-898-6984
    OCC Dean DeBuck 202-874-4876
    NCUA David Small 703-518-6336
    FCA Christine Quinn 703-883-4056

  4. toconnell
    toconnell says:

    Congress has adopted yet another Continuing Resolution to extend the ability of FEMA to operate the National Flood Insurance Program until Nov. 18, 2011. This was not without some controversy, however.

    However, a longer-lasting extension (probably for 5 years) is still controversial, and will probably result in higher insurance premiums and limiting FEMA to a smaller share of the market (which will mean more private insurance firms will have expand their offerings).

    And two Senators are calling for exemptions for property owners who are “protected” by existing levees or dams. Given the experience of flooding in “protected” areas, this seems very short-sighted.

    If you want to see where FEMA has paid our benefits under the NFIP, there is an interactive map at

  5. toconnell
    toconnell says:

    Once again, Congress approved a temporary extension of the National Flood Insurance Program, this time to December 16.

    Then, just before the program was set to expire (for something like the 12th time in recent years), the two houses of Congress voted to extend its authority again, but for different time periods. The House of Representatives included a 5-year extension in their bill extending the payroll tax reduction, unemployment insurance extension and other matters, and included some reforms to the NFIP. The Senate, on the other hand, approved only a 6-month extension. Both houses continue to negotiate on a longer term (5-year) extension with reforms to the program.

    In the meantime, the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania released a study that analyzes the role private insurance companies could play in offering residential flood insurance. The study notes that 2011 was the most costly year for natural disasters worldwide ($350 billion), with nearly 100 Presidential disaster declarations, two-thirds of which were from hurricanes and floods. It is also noted that the NFIP is now $17.8 billion in debt due to historical levels of flood claims following the 2005 and 2008 hurricane seasons, that many residents in flood-prone areas are not insured, and many of the maps used to determine flood zones are outdated.

    The Wharton study indicates that there may be opportunities for private flood insurance to supplement, or even compete with, the NFIP, providing lower cost coverage for some property owners. The analysis also indicates some fiscal reforms to the NFIP that would provide more actuarial balance between the rates charged and actual risk of losses, as well as a review of some mitigation measures that might might reduce losses in flood prone areas.

  6. Tim O'Connell
    Tim O'Connell says:

    Well, just when it looked like FEMA was out of the woods, along comes Superstorm Sandy. Congress provided an extension of FEMA’s authority to borrow from the Treasury and increased fees to help recover from the existing $18 billion debt FEMA was carrying after Hurricane Katrina and other disasters wiped out their fund balances. It was looking like the increased fees would start paying down the debt over the coming decade, with an expectation that up to $4 billion would have been repaid by the end of the decade.

    And all of that is now out the window due to one humongous storm event. Estimates of damage range from $7 to $20 billion and New York Mayor Bloomberg is asking for $30 billion in aide, just for New York. What other cities and states request will be added onto that, and Congress will have to dip deep into a Budget already suffering from a slow economy to assist them.

    Right now, FEMA has about $4 billion available to assist those damaged by Sandy, and will have to ask Congress for additional borrowing authority to fully respond to the catastrophic damage caused by the superstorm. In the long term, the National Flood Insurance Program needs serious thought.

    It is clear that the flood maps designating areas prone to flood damage are seriously out of date. Whether you accept the scientific evidence of climate change and rising sea levels or not, having your basement full of sea water is a pretty clear indication that many areas not designated as “flood plains” are actually subject to flood damage, especially along the coasts.

    It is also clear that provisions of the FEMA extension exempting areas “protected” by levees and other control structures were misguided, and now the communities north of Newark that were not covered by flood insurance because of that “protection” will have to bear the brunt of the cost of recovering from the knee-deep flood waters that inundated their homes and businesses.

    Finally, if FEMA and the states allow the communities damaged by Sandy to rebuild, even if levees and other flood control structures are put in place, we will be facing this again when the next serious storm arrives. We need to recognize that some places are too dangerous and expensive to build on, and move homes, businesses and public facilities to safer, higher ground, away from the rivers and oceans that will, eventually, flood the beaches, riverbanks and low-lying coastal areas.

    For more, see


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  1. […] at a NFIP discount premium, maybe the insurance is too cheap. The Century Housing organization in Should Taxpayers Subsidize Property Owners in Flood Areas?, states: “Private insurance companies provide almost no flood insurance, because the […]

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