Flood control

May 16, 2006

Last year's hurricane season was the most destructive on record, and forecasters aren't terribly optimistic about what the East Coast will have to endure this year. Despite the warnings, it looks like the nation's flood insurance program will be caught off guard - again.

New Orleans' levees weren't the only things found wanting when Hurricane Katrina struck. An estimated $23 billion in claims swamped the National Flood Insurance Program last year. It's time Congress offered the NFIP more than a bailout.

Nothing better illustrates the problem than a recent estimate from the Congressional Budget Office that the NFIP charges an average yearly premium of $700, but an actuarially adjusted rate (one that takes into account true costs and true risk) would be about $1,800. In an average year, this shortcoming might not be noticeable. The program can stay solvent by borrowing from the Treasury in high-loss years and paying back the money when times are better. But Katrina's claims add up to more than 10 times annual premiums and lay bare the problem - NFIP is overextended.

The 38-year-old insurance program has a laudable goal - to protect against property losses caused by floods. But as the risks have grown and the premiums haven't, the program has actually exacerbated the problem. Low-cost insurance is an indirect incentive for waterfront development. Think of it as an annual $1,100 subsidy toward a beach house. As coastal areas develop, so do the chances of huge future losses.

Legislation approved by a House committee this year would bring some welcome reforms, but they are not enough. The bill would raise rates on second homes and businesses, increase the limits of coverage (up to $335,000 for a residence compared with $250,000 today), increase deductibles and penalize lenders who allow flood insurance policies to lapse.

But what's really needed are floodplain maps that more accurately reflect the flood risk, and for the NFIP to gradually raise premiums for those who get a discount rate now. Lawmakers should also seriously consider broadening the mandate for flood insurance coverage and assessing risk on a multi-tiered basis so that rarely flooded areas aren't unfairly subsidizing parts of the country that frequently flood.

The reform bill faces a difficult time in Congress. But global warming and rising sea levels in the coming years are only going to make matters worse. The NFIP holds policies representing $871 billion in insurance coverage. It clearly can't afford another hurricane season like last year - and neither can taxpayers.

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