The 2017 hurricane season taught us that massive natural disasters can occur at any time. By not only damaging surrounding areas, displacing individuals from their homes, and disrupting major economic hubs, hurricanes can have drastic impacts on financial markets, the overall economy, taxpayers, and in politics.

Right now, headlines from all over the country, the Virgin Islands, and Puerto Rico all report that the Federal Emergency Management Agency (FEMA) is preparing for another devastating year. In between ever-changing climate trends to projections based on last year’s Hurricanes Maria and Irma, the 2018 year is expected to be a troubling one. To mitigate risks, residents in areas impacted by the storms—and regions inland that are known for river-linked flooding and runoff—are encouraged to buy into the National Flood Insurance Program.

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Lt. Governor and Commissioner of Insurance Osbert E. Potter of the U.S. Virgin Islands told the St. John Source that insurance subsidized through NFIP is pivotal to recovery from last year’s season and mitigation for this year. Potter said: “I urge everyone to protect their investment.” But does protecting an investment like a home provide a policyholder with a return on investment that matches need? Compared to past failures of the NFIP—and FEMA in general—flood insurance is a risky buy-in.

Don’t double guess me. NFIP has helped folks in the past; however, Hurricanes Maria and Irma revealed an institutional disparity that merits the program as a costly fix to a system that transcends the private and public sectors. In theory, the federal flood insurance programs work like traditional insurance policies. It covers certain items, reimbursements, and payouts on coverage are capped, among other aspects.

Flood insurance enrollment is required for businesses and residential structures in floodplains or “in areas at high risk of flooding.” But, the institutionalized disparity is the lack of control consumers get when they buy into the insurance policies provided by the program directly, or through insurance companies contracted to provide such plans.

For example, rates consumers pay for flood insurance are directly controlled by Congress. The last time members changed the rates, increases occurred meaning that high-risk property owners are subject to paying more. The increases, which were gradually appended to costs and accompanying at-risk properties, were then watered down. Say what you like about this, Congress and FEMA’s control over rates leaves major risks. One commentator mentioned that residents in flood-prone areas “aren’t millionaires, but working-class people.”

A devolution in quality of coverage occurs when central control occurs. Just like an economic scenario, markets provide for competitive rates. Since the 1950s, the federal government has focused more and more disaster relief funding into paying for insurance programs. Until this changeover, private homeowners plans had flood insurance included as a standard component of any policy. Private insurers these days are dependent on NFIP contracts which further prop up a system that’s controlled by a class of people that can afford to repair a home in the case of a disaster (or, at least more likely too). One recommendation I have is to democratize flood insurance plans with a focus on promoting competitive markets—and pricing.

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Another point of contention that should be addressed is the federal government’s role in disaster relief. Agencies like FEMA spend the majority of their budgets on “after-the-fact” humanitarian missions (e.g., flood insurance, temporary housing assistance, etc.). Though there is nothing nefarious about this, it’s just troubling to have in mind that disaster mitigation and prevention receives scant funding compared to these agency’s social assistance programs.

Nicole Gelinas, a senior fellow covering urban economics and finance at the conservative Manhattan Institute, noted this in her most recent commentary (and the creative force behind this one) on flood insurance. She noted that budgets at FEMA, the U.S. Army Corps of Engineers, and similar functions are dramatically unnerving.

“Overall, of FEMA’s disaster-relief fund, which constitutes about half of all federal disaster spending, 53 percent goes to helping governments replace what they lost and 22 percent to helping people rebuild,” she wrote for the Dallas Morning News. “Only 7 percent goes to “hazard mitigation,” or prevention. The Army Corps of Engineers’ annual budget to build and maintain levees is just $4.1 billion.”

Let that sink in. Flood insurance is a scam of sorts. That said, reforming the program to approach a more market-oriented approach to promote competitive pricing and coverage is one solution to consider.

This is part one of a series on the post-2017 hurricane season and the build up to the 2018 season.

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