Flood insurance as a federal service
In the U.S., flood insurance is a complicated matter, which is growing increasingly problematic as the days go by. Flood insurance throughout the country is handled by the National Flood Insurance Program, a federal program that offers coverage that is typically less expensive than what would be offered by private insurers. The program was launched in 1968 as a way for the federal government to account for the risks associated with flood disasters and the fact that many people lived in regions that were prone to such disasters. In 1973, flood insurance became mandatory for all people residing in Special Flood Hazard Areas, which were designated by the federal government.
Before the launch of the program, flood coverage was typically a part of homeowners insurance. The coverage offered through such policies were limited, however, as flood disasters were considered a significant financial risk for insurers. Today, insurers are against the idea of offering such coverage in some parts of the country because of the exposure that some states have to natural disasters. While the cost of coverage had been somewhat manageable in the past, policies through the federal program have been growing increasingly expensive over the past several years.
Hurricane Katrina strikes a blow against flood coverage
The problems for the National Flood Insurance Program truly began in 2005, when Hurricane Katrina struck a powerful blow to the U.S. The storm caused more than $108 billion worth of damage, much of which came from the state of Louisiana. The financial impact of Hurricane Katrina is still being felt by the National Flood Insurance Program to this day, as it has not yet fully recovered from the disaster. A series of other powerful storms have added further financial pressure on the federal program, limiting its ability to pay claims and creating a costly problem for the federal government in general.
Since 2005, federal lawmakers have been working to solve the problems associated with the federal program. The issue, however, is that these problems are multi-faceted and linked to the unpredictable and costly nature of natural disasters. In 2012, the Biggert-Waters Flood Insurance Reform Act was enacted, which seeks to implement changes to how the federal program is operated. The program is currently managed by the Federal Emergency Management Agency, which is responsible for determining the cost of the policies associated with the federal program.
Several of the provisions of the Biggert-Waters legislation have already been enacted, but several more are set to be enacted over the coming years. Some of these provisions will go live in 2014 and will have a dramatic impact on the cost of flood insurance throughout the U.S. Rates are expected to rise significantly due to these provisions, increasing by an average of 30% in regions that are designated to be high risk zones. These provisions are meant to resolve the financial problems that have crippled the federal program, but they have been met with staunch resistance from homeowners and businesses that will pay significantly more for the coverage they need.
A possible solution may lie in privatization
There is a solution to the federal program’s problems that is beginning to gain attention, though it is somewhat unconventional. Some federal lawmakers argue that private insurers are capable of handling the risks associated with flood insurance coverage. Large insurance corporations certainly have the assets to offer coverage in an effective manner, but have little incentive to do so due to the potential of grievous loss. If the federal government could provide some degree of financial safety net for these companies, they may be willing to take on the risks associated with flood coverage, thereby alleviating some of the strain burdening the National Flood Insurance Program.