Alarming post-Sandy Factoid: The National Flood Insurance Program is Still Broke

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If you ever want to have a really strange conversation with a politician, ask about floods. Rising water messes up more American cities, more extensively, more often, than virtually any other kind of disaster. But we don't talk about it.

Big Muddy swelling in '93


From 1993, when the Mississippi nearly took out Saint Louis, and did take out chunks of Iowa, Illinois and Minnesota; to a less-heralded storm that did similar damage to Florida the same year; to the destruction of Grand Forks; to Katrina; to rivers that tore through much of the mid-Atlantic in 2005 and 2006; to Irene washing big parts of the Hudson valley away last year; to the submersion of large parts of New York City this week, floods are a real, annual threat. They're the unsexy disaster, compared to earthquakes and twisters. But they are the one we face more often.

Most flood insurance is an extra, and it comes from a government program, the National Flood Insurance Program, which is administered by FEMA. This is because the free market doesn't want to be in the flood business. Like earthquake insurance in the West, the market for flood insurance is an economist's nightmare. Insuring against massive natural events wont to devour entire cities—supplemental Godzilla coverage—is not a great way to make money in the insurance game.

So you don't. So the government has to do it, lest whole swaths of America go uninsured against one of the more common and costly natural threats.

Great. Except: again like earthquake insurance, not so many people buy the flood policies. The NFIP, which has to bear the billions in damage when the claims do come in, can't make the arithmetic of low buy-in/high payout work. A prodigiously named 2010 study, Catastrophe Economics, by Wharton School economist Erwann Michel-Kerjan, found that the program can't shoulder events like Sandy:

...Claims from Hurricanes Katrina, Rita, and Wilma, and other floods in 2005 pushed the operating budget of the program into a deep hole. Hurricane Katrina alone generated $16.1 billion in flood insurance payments. Between 2005 and 2008, the program had to borrow a total of $19.3 billion from the U.S. Treasury. It will be very difficult for the program to repay this debt: total annual premiums for the program are about $3.2 billion and interest payments alone on the debt are nearly $900 million. In some sense, the debt accumulated after the 2005 losses just confirms what was known since the inception of the National Flood Insurance Program: it is designed to be financially self-supporting, or close to it, most of the time, but cannot handle extreme financial catastrophes by itself.

So, it's broke. Specifically, as Sandy headed north last weekend, the flood insurance system covered nearly $2 trillion in property, and on the other side of the ledger, was $18 billion in debt to the US Treasury. At which point, a few days ago, the rain began in New Jersey.