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Get Your Wallets Out

As the 2007 Atlantic hurricane season picks up steam with two Category 5 storms making landfall so far this year (a record), attention is being directed to the beleaguered National Flood Insurance Program. Run by the Federal Emergency Management Agency, it provides nearly all the flood coverage in the United States. The program was created in 1968 with the idea that it would offer subsidized rates in communities that adopted minimum building and zoning requirements. According to USA Today on August 29, over time the subsidized rates did far more to encourage development than to restrict it. In “Our view on coastal insurance: Help Gulf recover, but don’t subsidize the next disaster,” the editorial board explained how the program has backfired:

Political pressure has kept rates low, in effect forcing people in less vulnerable inland communities to subsidize people who live along the coast. And efforts at reform have been minimal. The program imposes no additional costs on properties that have been repeatedly damaged or destroyed. And a 1982 law that set some uniquely vulnerable undeveloped land off-limits to flood insurance has been undermined by exemptions granted to favored developers in congressional earmarks.

Hurricanes Katrina and Rita blew away any notions that the federal program could be self-sustaining, resulting in a shortfall of more than $20 billion. And guess who’s paying the bill? According to USAToday:

Taxpayers already have been called on to cover a Katrina-related flood insurance shortfall of more than $20 billion (in addition to much more for direct disaster relief they have provided). Washington is handling this in its usual manner — by borrowing from future generations.

After the deadly 2005 hurricane season, the Government Accountability Office added the federal insurance program to a short list of “high risk” areas in the government that the agency believes deserve urgent attention. Basically, the GAO believes that the National Flood Insurance Program is a financial disaster waiting to happen. It is likely they were aware of the long-range hurricane predictions of then-director of the National Hurricane Center Max Mayfield in September 2005. Mayfield told a congressional panel to expect more hurricanes large and small in the next 10 to 20 years. He believes that the Atlantic Ocean is in a cycle of increased hurricane activity that parallels an increase that started in the 1940s and ended in the 1960s. The ensuing lull lasted until 1995, then “it’s like somebody threw a switch,” Mayfield said. Hurricanes and tropical storms accounted for almost half of catastrophic insurance losses from 1986 to 2005.

With the National Flood Insurance Program $20 billion in arrears, hurricane experts predicting increased hurricane activity, and the GAO raising the alarm, what has Congress done? Not much, of course. According to the Associated Press on September 2:

Nearly everyone acknowledges it cannot pay off the debt, much less pay for losses in future storms. But so far, Congress has done little more than raise the program’s borrowing limit, essentially handing taxpayers a series of shaky IOUs… A failure to act could leave the public vulnerable to large bailouts of the program and help perpetuate a false confidence among some property owners that they do not need coverage.

Robert Hunter, a former director of the flood insurance program who now oversees insurance issues for the Consumer Federation of America, told the Associated Press that the early rhetoric was, “We’re going to fix this. We’re not going to tolerate this continued exposure of taxpayers to unlimited subsidies.’” Instead, says Hunter, “They’ve done nothing to fix it. It’s just unbelievable.”

Get your wallets out…