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Shore up flood insurance with individual mandate

As debate over extension of the National Flood Insurance Program rages while tropical disturbances that bring flooding rage, lawmakers should keep cognizant of the larger picture and remember what is sauce for the goose is sauce for the gander.

Historically, almost annually a significant flood hits somewhere in the U.S. Whether it be from sources as gigantic as the recent Hurricanes Harvey and Irma that just slammed Texas and Florida or as nondescript as the heavy rains that inundated New Orleans a month earlier, or from the Red River in northwest Louisiana to the other Red River in North Dakota, flooding that breaches habitable structures occurs widely in the country under widely different conditions. Indeed, last year every state had at least one NFIP claim.

Yet the U.S. has a schizophrenic policy to deal with these disasters. Almost a half-century ago, policy-makers hoped establishment of the NFIP would create a stable, self-funded regime to take care of the matter. But that rigid, government-run program takes poorly into account actual risk into its pricing, which as a result has failed to accumulate enough reserves to stave off losses triggered by huge weather events. As such, the program has debt of $25 billion.

This causes the federal government to pass special one-off appropriations in addition to claims on the NFIP to enable rebuilding of residences. In turn, that creates incentives for homeowners not to buy flood insurance, with the knowledge from past experiences of the government bailing out those without coverage, also contributing to the NFIP shortfall.

Additionally, memories fade quickly after a disaster and adjustment of flood maps tend to have covered proportions decline in areas that have flooded in the past; only those residences with federal-backed mortgages must have flood insurance which means only one in eight single-family residences nationally participate in the NFIP (with a very small number having private flood insurance). In New Orleans, for example, numbers have declined over the decade, 12 years after the hurricane disasters of 2005, with declinations to policy renewals picking up after flood map adjustments of last year.

Continuing to push back deadlines for NFIP reauthorization, Congress now has until Dec. 8 to keep the program going. Many members, including some of Louisiana’s delegation, have offered reform ideas. Whether these can address the central problem causing program insolvency seems doubtful: with rates underpricing risk and no requirement for universal coverage with reduced incentives to obtain it, underfunding seems inevitable.

But here, a newly discovered power of Congress can come to the rescue. In National Federation of Independent Business v. Sebelius, even as the reasoning came under heavy criticism for its creative interpretation of the Constitution, the U.S. Supreme Court affirmed that Congress could require individuals to have health insurance and penalize them if they did not. The same framework can apply to other kinds of insurance as well, as a “tax” on those who choose to own residences, whether they live in them full time, and businesses.

Congress could reshape the program to impose an individual mandate on the owner of every residence, whether single-family, and every commercial building owner, to have flood insurance. It would force every state and community to participate, then mandate very low rates for the overwhelming majority of properties. This would subsidize rates charged in areas that actually do flood and allow charging much higher but still below-market rates for these, set by the private sector as the government should exit the business. 

While this would expose a large number of owners to an additional fee that would pay for something never used in their lifetimes, it might well in the long run cost them less than the current policy. For example, for Hurricane Katrina the NFIP paid out $16.3 billion, part of the potential $25 billion bailout currently needed. That equates to over $50 for every U.S. resident. For a household of three, charging even $1 a month for flood insurance means it would almost 13 years of payments for that to equal the share that household owes for that one event. And even the poorest families can afford $12 a year as a result of owning their own home or have that passed along to them in rent.

Some may object to this arrangement, but the law already does this with health insurance, except that some (with the number ever increasing) receive it for free – insurance that in many cases covers for conditions that physically cannot happen to someone, just as flooding never could happen in some places. If they disagree with this idea, they need to turn their attention to repealing the same idea when it comes to health insurance.

Lawmakers and the courts have shown willingness to back this kind of program with health care insurance. There’s no reason policy-makers can’t transfer it to flood insurance to bring delivery of that rationality and solvency.

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