NCPA - National Center for Policy Analysis


February 20, 2006

The 37-year-old National Flood Insurance Program (NFIP) both encourages people to build homes where they otherwise would not and encourages lenders to finance mortgages they otherwise would not, says H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis.

Moreover, the program continues to pay claims for homes destroyed by floods, mudslides and other natural disasters without requiring homeowners to relocate. Homeowners can use the money to rebuild in the same location, and their new home is also eligible for NFIP coverage.

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 its creation in 1968, the 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.
  • 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 in the past 10 years.

In New Orleans, in part because of the extensive levee system, many properties were underinsured or uninsured. Yet based on statements from the Administration and in Congress, the federal government seems likely to help both the insured and the uninsured alike to rebuild, says Burnett.

This makes those who didn't pay for the insurance seem like geniuses and those who carried the insurance seem like suckers -- a powerful message to those who consider insuring property in the future. Regardless, the federal response to New Orleans' recent flooding offers little hope that people will make wiser development decisions in the future, says Burnett.

Source: H. Sterling Burnett, "Perversions Insured,", February 17, 2006.

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