NCPA - National Center for Policy Analysis


September 7, 2005

Federally subsidized flood insurance encourages people to build homes in floodplains. It also encourages lenders to finance mortgages for these risky homes. Today, the National Flood Insurance Program (NFIP) covers more than 4.5 million homes in more than 20,000 communities. But because of full-disclosure mortgage and insurance requirements, most of those currently insured were aware of their area's flood problems when they purchased or developed their properties, says Christy G. Black, a research associate with the National Center for Policy Analysis.

Yet, when NFIP pays claims for homes damaged or destroyed by floods, mudslides and other natural disasters, it does not require homeowners to relocate. They can use the money to rebuild in the same location, and their new home can also be covered by NFIP.

According to the Federal Emergency Management Agency (FEMA), repetitive claims are the most significant factor in increasing flood insurance costs:

  • NFIP pays claims averaging $200 million per year for about 40,000 repetitively flooded properties.
  • Since 1984, NFIP has paid out nearly $1 billion for at least 10,000 properties that have experienced two or more losses, with cumulative claims often exceeding the value of the property.

The Government Accountability Office reports that 90 percent of all natural disasters involve flooding. Although they are called "natural," many would not be nearly as destructive had people and property not been placed in harm's way, says Black:

  • Flood damage costs increased from an average of $2.6 billion per year (in 2002 dollars) during the first half of the 20th century to more than $6 billion per year over the past 10 years.
  • In 2004 alone, FEMA received 1.3 million applications for federal disaster assistance due to hurricanes and tropical storms - far exceeding the number for any comparable period.

Source: Christy G. Black, "Subsidizing Disaster," National Center for Policy Analysis, Brief Analysis No. 525, September 7, 2005.

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