It’s no great revelation that when prices are centrally controlled, they tend not to reflect reality. In some cases, this means that consumers pay less than the true value of a good or product. In other cases, they pay too much.

While the Soviet Union eventually learned this lesson, it’s not clear our federal government has.

The National Flood Insurance Program is a poster child of distorted pricing and bizarre consumer outcomes. The program, conceived in the 1960s as a way to ensure access to flood insurance, is set to expire Sept. 30. Today, it is $24.6 billion in debt and projected by its own actuaries to lose about $1.1 billion every year. This is due both to the program spending years failing to account for the risk of large catastrophes, like Hurricane Katrina and Superstorm Sandy, the way that private insurance companies do by buying reinsurance. It’s also because about one in every five policies are subsidized, charged only a fraction of what the risk they face would demand.

But according to a recently released analysis by the actuarial consultant Milliman and risk-modeling firm KatRisk, in addition to undercharging a large segment of policies, the NFIP also frequently charges policyholders more than necessary. Milliman’s analysis examines three flood-prone states—Florida, Louisiana and Texas—thatcollectively account for more than half the nation’s in-force NFIP policies. In each state, the majority of single-family homes currently covered by the NFIP would see their rates go down with private flood coverage.

In fact, within the states, in areas subject to the highest risk of coastal flooding, known as VE zones, 62 percent of Florida homes, 85 percent of Louisiana homes and 88 percent of Texas homes could see lower premiums from the private market than under the NFIP. For relatively lower-risk A, AE and AH zones, 42 percent to 95 percent of homes in the three states could see a lower premium, compared to the NFIP.

The availability of private flood insurance is crucial not only because it will save consumers money, which may also lead to higher take-up rates, but also because it will insulate taxpayers from yet larger NFIP liabilities.

As Congress moves forward on legislation to reform and reauthorize the NFIP, it’s crucial that it look to encourage more private flood insurance. Not only would a larger private market take more of this risk off the backs of taxpayers, but for many consumers, it would mean lower rates.

Image by Neil Lockhar


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