Hot Potato: Food for Thought
Where Did All the Money Go?
Flood Insurance
1997 July 28

Congress decided more than 20 years ago to deal with flood losses by offering flood insurance. This is another case of a well-intentioned policy having unexpected and expensive side effects.

Prior to federal flood insurance, it was nearly impossible to buy flood insurance. Private sector flood insurance is not practical because no entity except the government has the resources to pay claims in the event of a big loss. The enabling legislation required that insurance premiums be actuarially based. Had this been implemented, the flood insurance program would cover its losses out of premiums, but even in good years the program runs at a loss.

The availability of flood insurance allowed banks to issue mortgages for coastal development, which had always been too risky before insurance was available. The result of the policy was to subsidize development (mostly for the rich) in coastal areas vulnerable to hurricane storm surge. That is why storm-related losses have increased so much in the past decade or two.

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