Policy Documents

Midwest Flooding Disaster: Rethinking Federal Flood Insurance

Rawle O. King –
August 11, 2008

Historically, floods have caused more economic loss to the nation than any other form of natural disaster. In 1968, Congress created the National Flood Insurance Program (NFIP) in response to rising flood losses and escalating costs resulting from ad-hoc appropriations for disaster relief. Federal flood insurance was designed to provide an alternative to federal disaster relief outlays by reducing the rising federal costs through premium collection and mitigation activities. The purchase of flood insurance was considered to be an economically efficient way to indemnify property owners for flood losses and internalize the risk of locating investments in the floodplains.

Despite massive rainfall-river flooding in several Midwestern states along the upper Mississippi River and its tributaries in June 2008, damages for the most part are not expected to produce significant insured flood losses under the NFIP. This significant but not unprecedented flood event instead will likely cost several billions in uninsured damages that will probably remain uncompensated or be paid through federal emergency supplemental appropriations for disaster relief.

A key lesson learned from the 1993 and 2008 Midwest floods is that many people believe that the government will provide them with economic assistance despite their lack of insurance. What then is the appropriate role of the federal government in dealing with ambiguous risks, where the insurance industry is reluctant to offer coverage and homeowners and businesses demonstrated a reluctance to purchase coverage, even when is it mandatory? This question is important for the long-term solvency of the NFIP and overall future costs to federal taxpayers.

This report examines the impact of the 2008 Midwest floods on the National Flood Insurance Program (NFIP) in the context of congressional efforts to reauthorize and modify the program before its authorization expires on September 30, 2008. The report begins with an assessment of the risk of flooding in the United States and why Congress might move to rethink the current multifaceted approach to federal flood insurance. Members might, for example, opt to assess possible insurance requirements for individuals living behind levees, eliminate premium subsidization of certain “grandfathered” properties, expand the NFIP to offer coverage against both flood and wind damages, and consider undertaking a nationwide flood insurance study (FIS) and remapping of the nation’s floodplains, including areas behind levees and other flood control structures. The report concludes with lessons learned from the 1993 and 2008 Midwest floods, and an analysis of the NFIP’s current financial conditions and major policy issues, as well as a summary of legislative proposals — H.R. 3121 and S. 2284 — pending before the 110th Congress.