Monday, December 10, 2012

National Flood Insurance and the Cost to the American Taxpayer

National Flood Insurance and the Cost to the American Taxpayer

Every American taxpayer is footing the bill for the National Flood Insurance Program, which subsidizes the costs inherent in building and owning property in high-risk areas along shorelines and on flood plains.  It has never paid for itself. The premiums are artificially low and do not reflect the risk involved. The program is currently $18,000,000,000 (BILLION) in debt.

Property & Casualty Insurers in the private sector have always declined to provide insurance coverage against floods or losses caused by surface water.  There is a great reason for this – it is impossible to make a profit! Insurance companies are not charitable organizations. And in order to make a profit, it is necessary to analyze and spread risk. Since one cannot compel a homeowner living on a mountain to buy flood insurance, it is not possible to adequately spread the risk.

Companies who sell property insurance are betting that a certain type of loss won’t happen. They take many factors into account such as the location of the property, its proximity to a fire hydrant and the nearest fire department, the type of construction, the year of construction, the local building codes, whether the property owner has burglar alarms or a sprinkler system and the type of dog one owns.  Premiums are based upon the risks that a certain type of claim will occur in a particular geographic area over a period of time.

Floods, earthquakes, volcanic eruptions and mudslides are not good bets. Property insurance was originally to cover one risk only – fire. If one purchased fire insurance one had a plaque on the house and the fire department would try to put out the fire. If there was no plaque, well…..too bad for you!

The federally subsidized flood insurance essentially rewards bad judgment in that it pays people who sustain damage after building in a high-risk location. If a homeowner rebuilds in the same place and sustains flood damage from multiple events, the national flood insurance will pay again and again. There is no incentive for people to move to a place with less risk.

It is extremely rare for a tornado to destroy the same house twice. I’ve seen it happen once in 30 years of claims handling. It is highly unlikely that a homeowner will experience more than one catastrophic house fire. However, the same properties are damaged or destroyed multiple times by surface water or flooding. And we pay for it.  The American taxpayer should not have to subsidize the risk for people who choose to live on the ocean or the banks of a river. 

I would love to live on the beach. But if I choose to purchase waterfront property, I must be prepared to accept the risks. I should not expect my fellow American citizens to subsidize my choices. We Americans cherish our rights to make choices about how and where we will live. But part of that privilege should also include the acceptance of the risks associates with our decisions. Our founding fathers understood there was risk in making decisions. Unfortunately, many today do not. But in any event, homeowners in Nebraska or West Virginia should not have to foot the bill for people who own beachfront property in Florida or New Jersey. And with the National Flood Insurance Program being billions in debt, we all have to pay.

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