Flooding the Markets

Partner: National Wildlife Federation

Photo by Taylor Bell.

The National Wildlife Federation is concerned that the government’s flood insurance program, which provides insurance subsidies to homeowners in flood-prone areas, causes significant environmental damage. They brought the issue to Policy Integrity to look into the economics of the program—especially who benefits and who pays.

The National Flood Insurance Program (NFIP), a division of the Federal Emergency Management Agency (FEMA), provides low-cost insurance rates for homes and businesses. The cheap policies encourage development in risky, low-lying and coastal areas—the same areas that tend to be ecologically sensitive. When disaster strikes, the government (and ultimately taxpayers) must pay the bills.

Research for a policy brief, released in April 2010, found that middle-income areas are least likely to benefit from the program. Instead, the program’s subsidies help wealthy areas, including large beachfront properties or vacation homes, and individuals lower down the income distribution during severe weather events. The cost of these policies—and the associated environmental and economic risks of building in floodplains—are borne by all taxpayers.

“NFIP sometimes works like a backwards Robin Hood—using taxpayer dollars to provide subsidies for environmentally questionable development in high income areas,” said Policy Integrity executive director, Michael Livermore. “As currently structured, the program is not well designed to target support to the people most in need.”

This analysis came as the House Financial Services Committee is set to advance legislation that would maintain many of NFIP’s current policies for several years.

Report author and economics fellow, Scott Holladay said, “As lawmakers consider the future of the National Flood Insurance Program, they should be aware that the policy redistributes wealth across income groups in ways they might not intend. Middle-income areas are least likely to benefit, and while the program does seem to help lower income people during years with lots of claims, relatively wealthy areas are tend to be large beneficiaries every year.”

Issue(s): Cost-Benefit Analysis, Energy and Environment