Should tax payers pay to help insure people who choose to live in hazardous areas? This is a tough conversation to have, but we should have it. (Dearest libertarians, please exit the convo here).
Simply, people’s homes and businesses are often located in dangerous areas. The most popular danger is flooding, and millions(!) of properties are located in flood plains. It’s very risky. Property owners need insurance to help lower risk and protect their ‘investment.’ The higher the risk from environment, the higher the insurance premium.
But, there comes a point in that risk equation where insurance companies will stop offering insurance to cover at-risk buildings and properties. So of course this creates a problem for property owners. If private insurance companies refuse to insure risky property, who should? Should you?
For one example (again simplified), in order to get a mortgage from a bank, the property owner has to show proof of insurance. But how can they get insurance if their home is deemed a high risk? The answer is tax payers. FEMA covers insurance for at-risk property owners through something called the National Flood Insurance Program. It’s funded by taxpayers, and (again simplified) insures millions of properties that cannot obtain insurance on the market. If one of these properties is flooded, part of the cost (not all of it) is paid for by you, the taxpayer.
Now, the portion of FEMA’s budget that covers the NFIP is about to expire, and FEMA put out this press release:
"Many businesses, commercial owners, homeowners and renters purchase flood insurance to reduce the escalating costs of repairing damage to buildings and their contents caused by floods.
As we approach a potentially active hurricane season, FEMA’s Administrator, W. Craig Fugate, is engaging Congress to strongly recommend reauthorization of the National Flood Insurance Program (NFIP) which will expire on May 31, 2012.
The NFIP plays a key role in our Nation’s efforts to prevent and recover from flood disasters. Reauthorization of the NFIP before it expires on May 31, 2012, is essential to our Nation’s efforts to prevent and recover from flood disasters. Floods are the number one natural disaster in the United States in terms of lives lost and property damaged. The NFIP identifies areas of flood risk; it encourages communities to implement measures to mitigate against the risk of flood loss; it provides financial assistance to help individuals recover more rapidly from flooding disasters; and it lessens the financial impact of flood disasters on individuals, businesses, and all levels of government.
In recent years, a series of short-term reauthorizations and temporary suspensions of the NFIP have eroded confidence in the program among stakeholders, including state governments, tribal governments, local communities, individual policyholders, mortgage lenders, and the private insurance industry. In addition to disrupting the program’s day-to-day operations, short-term reauthorizations and temporary suspensions create significant uncertainty regarding the federal government’s long-term commitment to underwriting and indemnifying flood losses. In the absence of such a commitment, our stakeholders are less likely to make the investments needed to successfully sustain, strengthen, and grow the program — thereby undermining the NFIP’s effectiveness and efficiency over time.
A two year re-authorization will send a clear signal to citizens, communities, and private sector partners that the federal government will continue to support our nation’s efforts to manage flood risk. If Congress does not re-authorize the NFIP before it expires on May 31, 2012:
- Property owners will be unable to complete new mortgage transactions. Property owners who would normally be required to purchase flood insurance to fulfill lending requirements will be unable to obtain affordable coverage. The National Association of REALTORS estimates that a lapse in authorization jeopardizes an estimated 1,300 sales each day or about 40,000 mortgage closings per month.
- The Disaster Relief Fund will bear additional costs when flood strike. Property owners who are unable to obtain flood insurance coverage may seek and be eligible for assistance from the Disaster Relief Fund. Consequently, failure to reauthorize the NFIP will result in transferring a portion of the costs of flood losses that otherwise would have been paid by the NFIP to the taxpayer through the Disaster Relief Fund.
- The NFIP may have to halt payment of claims for recent events, including Hurricanes Irene and Lee, if a lapse in authorization substantially reduces cash flow into the program from premiums or a significant flood event follows the lapse and drains the remaining, non-renewable funds.
FEMA’s mission is to support our citizens and first responders to ensure that as a nation we work together to build, sustain, and improve our capability to prepare for, protect against, respond to, recover from, and mitigate all hazards.”
Tell me what you think? Should the National Flood Insurance Program continue to be funded? Should anything be put in its place?