Eakinomics: One Small Step for the NFIP, but….

Eakinomics: One Small Step for the NFIP, but…. …A giant leap for nobody. The National Flood Insurance Program (NFIP) has long been the bane of any policy analyst’s existence. The NFIP is riddled with poor policy foundations and weak financial performance. Any insurance program relies on a balanced pool of larger and smaller risks, good underwriting, and actuarial pricing so that premiums on average cover the cost of payouts. The NFIP is anything but that. The flood maps are badly out of date and do not identify the right pool of at-risk homes and businesses. There is widespread failure to participate in the program, leading to adverse selection as those places most likely to be damaged become the bulk of the book of business. Despite these transparent flaws, since fiscal year 2017 the program has undergone 12 short-term extensions and brief lapses without even a whiff of serious reform. The only significant development was that Congress chose to forgive $16 billion in debt that NFIP owed the Treasury (and the U.S. taxpayer) — shades of Bernie Sanders. It has been a pretty underwhelming political performance. In this setting, it is (modestly) encouraging to see the House Financial Services Committee vote to reauthorize the NFIP for 5 years, and to include sensible, small-scale reforms in the mix. As elucidated by Thomas Wade and Bryce Fuemmeler, H.R. 3111 (The National Flood Insurance Program Administration Reform Act of 2019) and H.R. 3167 (The National Flood Insurance Program Reauthorization Act of 2019) were passed unanimously and together constitute the reform package. They note that H.R. 3111 modifies the Write Your Own Program to further allow “private insurers to provide primary coverage to a majority of policyholders and … leaves NFIP as a reinsurer of last resort.” This change is “a step in the right direction, as enhanced private participation in flood insurance can only reduce the NFIP’s risk portfolio.” In addition, H.R. 3167 authorizes the appropriation of $500 million for mapping technology and $100 million annually in the mapping budget. When combined with making it easier to opt into the NFIP and providing better information to potential buyers, this mapping boost may expand the coverage pool of the program. That’s the good news. The bad news is that the flawed premium process remains untouched. Until the improved information provided by better maps and the broader pools envisioned by enrollment incentives are translated into premiums that more accurately reflect the flood risks, the program will continue to distort land use and rely on taxpayer bailouts.