Posted On: September 8, 2008, 8:00 am CDT

Posted By: Webster

People seem to forget that the reason the NFIP came about in the first place was to require people to buy flood insurance in advance so they wouldn't need to look to the government for low-interest loans or grants after the fact. The Flood Act puts teeth to the requirement by forcing lenders to make borrowers have flood insurance, or the lenders are fined. It doesn't apply to everyone, since not all property owners have mortgages -- but most do.
The problem is that the NFIP became an alternative market at non-actuarial rates, making commercial insurers uncompetitive and enabling them to shy away from the risk. If the government wants to make meaningful reform, they ought to require CAT coverage for properties that are at risk, impose the obligation on the lenders as they already do with flood cover, but also mandate that the commercial markets provide the coverage and disband the NFIP. Maybe keep the NFIP running for current owners of primary residences, but cut it off when ownership changes. Yes, this may cause some insurers to withdraw from at-risk areas. Yes, it is likely to cause premiums to increase. That is appropriate. Ultimately this will cause people to own or build in areas that are less at risk, or build better damage-resistant structures, or buy in those areas only if they can truly afford the costs of being there. The government should not be the ultimate backstop in perpetuity.