NCPA - National Center for Policy Analysis

Federal Benevolence Kills Flood Insurance Incentive

November 10, 2000

Many homeowners and small businesses in risk-prone areas avoid purchasing flood insurance. According to the Federal Emergency Management Agency, only about one-quarter to one-third of them bother to purchase policies. And many who do insure against floods eventually let their expensive policies lapse.

The reason is that they know a truly devastating loss will elicit an outpouring of government grants, loans and other official aid.

  • After Congress passed the Federal Disaster Relief Act in 1950 -- authorizing federal assistance in the aftermath of natural disasters -- first year spending amounted to only about $5 million.
  • Last year, federal disaster relief totaled about $5 billion -- and experts project the figure will increase to $50 billion by 2030.
  • Congress created the National Flood Insurance Program in 1968 in an effort to coax homeowners and businesses to buy flood insurance rather than rely on emergency federal assistance, but those at risk weren't particularly interested -- with only 1.8 million policies in force by 1979.
  • It wasn't until Congress tightened mandatory coverage rules in 1994 that policy sales began to pick up -- although there were still only about 4.3 million policies in force as of 1999.

Rather than trading pre-funded insurance coverage for bailouts, the nation now has both. Property owners who fail to insure are eligible for a staggering array of government grant and loan programs. Experts say that federal flood relief policy discourages personal responsibility, while encouraging building in risky areas.

Source: John Hood (John Locke Foundation), "Who Insures Against Floods, and Why," Consumers' Research, October 2000.


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