A Flood of Altruism

More than 300,000 home owners in the Houston area can expect significant increases in their flood insurance. The National Flood Insurance Program (NFIH), which insures those homes, is more than $24 billion in debt and Congress is expected to end the subsidies that are bankrupting the program.

NFIH was created because private insurers didn’t want to bear the risk of insuring homes in floor prone areas. So, in typical altruist fashion, the government stepped in. Home owners had a need, and keeping with altruism, others have a moral responsibility to satisfy that need. Further, rather than charge market rates, the government decided to force taxpayers to subsidize those who purchased flood insurance.

In the past decade, Congress has attempted to reform the program on several occasions. But pressure from real estate interests put a stop to reform efforts.

U.S Rep. Ted Poe of Kingwood, sent a letter to constituents last week that stated, “Congressional committees are beginning work on flood insurance renewal, and that ‘preliminary plans allow private insurers greater and easier access to the marketplace.'” That’s a step in the right direction, but we have to wonder what impediments currently exist that keep private insurers out of the market.

While the trend seems to be towards privatization of flood insurance, there are those who continue to advocate for an altruistic program. SaferSmarter, a coalition of housing and insurance groups, advocates a risk-based pricing system along with subsidies for low-income homeowners. And guess who will get to pay those subsidies–either taxpayers or other homeowners. In either case, the result will not be risk-based pricing.

Subsidies are used to encourage actions that would otherwise be economically irrational. For example, government gives subsidies to renewable energy companies because private investors have concluded that such companies are unlikely to make a profit. Companies such as Solyndra would never get started without subsidies.

Subsidizing flood insurance encourages individuals to purchase or retain homes in flood prone areas. They don’t have to bear the full cost of ownership. Much of the risk is passed on to others.

The only proper and long-term solution is to remove altruism from the flood insurance market. Free the insurance companies to price policies according to their assessment of the risks. And free taxpayers from bearing the costs that morally should be borne those who live in flood prone areas.

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