Pros And Cons Of The NFIP

The National Flood Insurance Program (NFIP) was established in 1968 to address the U.S.’s flood exposure and the challenges inherent in financing and managing flood risks in the private insurance market. Private insurance companies at the time claimed that due to the correlated nature of the flood peril, it was an uninsurable risk and it could not be underwritten in the private insurance market. (King; Congressional Research Service). Although the NFIP has been effective in making flood insurance widely available, the program has encouraged homeowners to buy recklessly in areas that are the most prone to flood damage (Matthews; TIME.com). Today, the NFIP holds $1.2 trillion in loss exposure but collects only $3.5 billion from its policyholders,

Ideally, the elimination of NFIP subsidies would adjust financial incentives so as to cause people to either move out of flood zones, or to pay more for the privilege of living in flood zones. (Fox; Columbia Journal).

The failures of the NFIP have been long acknowledged and numerous attempts to reform the program have been made since 1979. The most recent effort to reform the NFIP is the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters), which eliminated subsidized premiums and adjusted premium rates to reflect actual flood risk (Fox; Columbia Jorurnal). The amendments led to significant backlash resulting from the significant rate increases. These oppositions led to the passage of the Homeowner Flood Insurance Affordability Act of 2014 in 2014, which repealed many provisions of Biggert-Waters (Fox; Columbia

Many of the barriers for the privatization of flood insurance have been addressed since the establishment of the NFIP 40 years ago. The Federal Government has produced and updated flood hazard data for over 92% of America’s population, more than 21,000 communities in high-flood risk areas adhere to minimum building and land use criteria, and financial instruments such as disaster bonds and auctioning risk, could be used to help manage private insures’ risks (Straw Man Policy; ndfaflood.com). Additionally, advances in mapping, risk modeling and the ability to spread risk globally means that many logistical problems that the insurance industry once faced in insuring flood coverage have been lessened or solved. (Lehnmann; R Street Institution). Several states such as West Virginia and Florida, have recently advanced legislation to increase the availability of private flood insurance (Fitch Ratings; Starr Companies). Private flood coverage is also in many other developed markets, including the United Kingdom, Germany and Australia (Postal). The privatization of flood coverage could also lead to the availability of broader coverage options than what is available under the NFIP, such as business interruption