The impact of Hurricane Harvey intensifies an already brewing storm over U.S. federal flood insurance. The Texas disaster, which President Donald Trump is seeing firsthand on Tuesday, will put the government coverage program, already $25 billion in debt, further under water. Among other snags, the subsidized backstop insurance encourages building in high-risk areas.
The National Flood Insurance Program, which is set to expire at the end of September, fell into debt after Hurricane Katrina in 2005 when it paid out $18 billion. Harvey could increase the red ink to $40 billion, according to U.S. lawmakers pushing for reform. That's not surprising, given the huge subsidies. The average annual NFIP premium was $878 in a recent ValuePenguin study, with coverage for a residence and its contents capped at $350,000. Private insurance can be cheaper in lower-risk areas but can cost as much as $14,000 in areas prone to regular flooding, according to the research.
The program also offers up to a 65 percent discount for about 20 percent of policyholders with older properties. The median value of an NFIP-insured home is twice that of a typical U.S. home, while vacation properties account for 25 percent of subsidized insurance policies, according to the Congressional Budget Office. More than 30,000 homes that have flooded multiple times have been rebuilt with the help of NFIP, according to the Natural Resources Defense Council – though they represent under 1 percent of the homes in the program.
Congress phased out the lowest rates in 2012 but reinstated them two years later. Now lawmakers are facing another debate when they return to Washington next week, on legislation that would reauthorize the NFIP for five years. In exchange, it would limit or exclude coverage for high-risk properties and encourage more private insurers to participate in the market.
Some politicians argue that now is not the time for reforms. They are particularly worried about higher costs for constituents. But the Texas inundation is the ideal catalyst. The NFIP distorts the market. Moreover climate change, which some in the Trump administration refuse to recognize, is likely to make episodes of flooding worse. Almost 2 million homes worth nearly $900 billion are at risk of being underwater by 2100, according to Zillow. Lawmakers need to do some urgent repairs.
Commentary by Gina Chon, a Washington columist at Breakingviews. Follow her on Twitter @GinaChon.
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