Flood Insurance: A Case Study in a Good Idea Gone Bad

The federal government sues Mississippi fairly often. Less often, Mississippi sues America — but it does happen.
Two years ago, the state Department of Insurance objected in court to congressional action to sustain the National Flood Insurance Program. Why? The law made the insurance cost too much — way too much.
Congress backed off. Last month Commissioner of Insurance Mike Chaney, a Republican, dropped the state’s lawsuit.
There’s no better case study good legislation gone bad than the NFIP, created in 1968.
The situation was this: Owners of private property in frequently flooded areas could not buy private policies to guard against flood losses. Fire, theft, tornado – yes. Overland flooding – no. Insurance companies would not underwrite the risk, period.
But lots of properties are vulnerable along the Mississippi and other rivers. Storm surges pose, as we all know, a serious risk on the Gulf Coast.
Early on, the NFIP was to (1) provide subsidized coverage and (2) discourage development in known flood areas.
Specifically, private insurance companies would still sell the policies, but at discounted rates backstopped by Uncle Sam. In the event of a claim, the property owner would be paid the cost of repairs with one important catch: A home or other structure would be “totaled” — owners paid the pre-flood value — if the damage was more than 50 percent. Further, cities and counties had to agree not to allow construction in a known flood area or allow rebuilding on a “totaled” site unless the floor level was above the flood level.
For many Mississippi counties, this meant big changes. Some had no building codes or inspectors, but to be NFIP-eligible, supervisors had to enact codes and hire inspectors. For the first time, they were faced with saying to rural constituents, “Yes, it is your land. But you can’t put a trailer for your hunting camp, much less a stick-built structure, on it without permission.”
Tossing aside the tempests that created, NFIP worked pretty well. Property owners and mortgage companies liked it because their investments were secure. Insurance companies loved it because they faced zero risk. Any subsidies paid from the federal treasury were minuscule in comparison to the budget overall. Even lowland deer and turkey hunters became accustomed to steep stairs at their camp houses.
Over time, enforcement of “don’t build in flood areas,” was relaxed and there were lots of work-arounds in the law, too. After all, lenders faced no risk in providing mortgages on homes and even apartment complexes, hotels, factories.
Then along came Katrina, Rita, Wilma and the record Mississippi River flood of 2011.
To pay claims, NFIP borrowed $18 billion from the treasury.
Seeing the program awash in red ink, Congress, with bipartisan support, “restructured” the program in July 2012. Problem was, that for NFIP to pay its own way, some property owners were facing 7,000 percent premium increases. Time magazine cites one South Louisiana property owner whose annual flood insurance premium rose from $633 per year to $18,000.
The legislation’s math worked but the politics didn’t. To retain their slim Senate majority, Democrats need Louisiana’s Mary Landrieu to be re-elected. There was the Chaney lawsuit. So the celebration by federal lawmakers of having at least one federal program that made fiscal sense was short-lived. The matter of fixing NFIP is back on the drawing board. And there it will likely remain.
Mississippians in high-risk areas are paying ever-higher premiums for coverage, but those premiums still won’t cover the total of potential claims the next time Mother Nature rampages.
Insurance companies are fat and happy. They know they still can’t lose. Taxpayers will cover them.
Landrieu is in better shape to win re-election, although voters have another beef. (Her fellow Democrats are aligned against Keystone, the Canada to Louisiana oil pipeline that would bring a windfall to her state.)
But the NFIP books?
A mess.
Another $7 billion was borrowed after Hurricane Sandy (aka Superstorm Sandy) last year.
Voters are indoctrinated to think “Democrat” means good and “Republican” means evil – or vice versa. It really doesn’t work that way. Consider Chaney, a champion of government living within its means, deciding to sue Congress for trying to balance one tiny component of the budget. He really had not choice. And consider how Senate Democrats felt compelled to make Landrieu look good to her voters.
The NFIP is a wonderful case study is how government can do good.
And it’s a wonderful example of how good programs with good intentions can be derailed.
– Charlie Mitchell is a Mississippi journalist. Write to him at Box 1, University, MS 38677, or e-mail cmitchell43@yahoo.com.