The floods that hit the cities and towns of the Ninth District
this past spring may seem a dim, unpleasant memory as winter approaches.
But while public attention to flooding tends to recede along with
the waters, government flood policy builds over time. The Great
Midwest Flood of 1993 helped focus debate around several policy
initiatives, including structural flood control (that is, dams and
levees) and property buyouts, as discussed in the September fedgazette
cover story. Two other
programs that have drawn serious attention—flood insurance
and wetlands restoration—also offer both potential and predicaments.
And some flood experts contend that all these policies will fail
unless we recognize that flood disasters are a moving target: Floodplain
management must continually evolve simply because humans constantly
change their relationship to the rivers and lakes that bring us
such joy—and such misery.
After devastating floods in the mid-1960s, Congress devised a plan
to institutionalize flood insurance, in the hope that it would decrease
future disaster relief costs. The National Flood Insurance Program
(NFIP), under the Federal Emergency Management Agency's (FEMA) National
Insurance Administration, sought to sign up floodplain residents
for government-backed insurance policies. It was a simple enough
idea: Home- and business-owners would be encouraged to pay annual
premiums in return for payouts in times of disaster.
The problem is, NFIP is broken. In fact, it was designed to be
To encourage people to enroll in the program, NFIP subsidized premiums
from the start, charging policyholders less than would be required
in an actuarially sound insurance program. In other words, policyholders
don't have to assume the full risk because taxpayers cover part
Because of these premium subsidies—and with the extensive
flooding of the 1990s—NFIP incurred losses totaling $1.56 billion
between 1993 and 1998. To finance those losses, NFIP borrowed from
the U.S. Treasury. Fortunately, lower payouts in 1999 and 2000 enabled
NFIP to repay its debt, according to a July 2001 General Accounting
Office (GAO) analysis. But chances are good that NFIP will again
be knocking on the Treasury's door, "because it does not collect
sufficient premium income to build reserves to meet the long-term
future expected flood losses," according to GAO. "The
program is not, by design, actuarially sound."
Better but still broken
The subsidy has been reduced since the program's inception in 1968.
Eligibility requirements for lower premiums have tightened, and
the size of the premium reduction itself has diminished. Still,
about 30 percent of policies remain eligible for subsidized rates,
and those policyholders pay only 38 percent of the full-risk premiums
for their properties.
Decreasing the subsidy, however, had an unwanted side effect.
As insurance premiums rose, some policyholders stopped renewing
their policies, especially after several years without a flood made
another seem unlikely. And since not all banks enforced the requirement—passed
in 1973—that mortgage-holders of federally backed mortgages
sign up for flood insurance, homeowners and business people had
one less reason to pay for it. A 1994 NFIP reform stiffened bank
oversight and compliance has improved.
Still, today, just a fraction of floodplain owners actually have
flood insurance, though national estimates of that fraction vary
widely. A 1993 report said that fewer than 42,000 households of
the 803,000 residing in special flood-hazard areas had purchased
flood insurance before the 1993 flood—just 5.2 percent. In
1998, NFIP's director, Ed Pasterick, estimated that "the current
4 million NFIP policies represent less than half of those property
owners who should carry the coverage." A 1999 National Academy
of Sciences report on disasters estimated that about 20 percent
of homes exposed to floods are insured against them. A recent FEMA
estimate is that 27 percent of all floodplain owners hold flood
Ninth District numbers
NFIP policy participation is low in Ninth District states. Authorities
in Wisconsin say fewer than 14 percent of structures on state floodplains
are currently enrolled in NFIP. And they estimate "even lower
participation rates in many Mississippi River communities,"
said Gary Heinrichs of the Wisconsin Department of Natural Resources.
"If 13.5 percent is the figure for the state as a whole, in
some areas we may have well less than 10 percent of floodplain properties
with flood insurance." In Crawford County in southwestern Wisconsin,
said Heinrichs, "where there are hundreds and hundreds of structures,
I think there's less than 30 flood insurance policies."
Ironically, FEMA's acquisition program could be contributing to
the problem. (See the September fedgazette.)
"To the extent that floodplain residents begin to presume the
availability of buyouts in the event of a flood," wrote NFIP's
Pasterick, "the incentive to purchase flood insurance is significantly
But of course, if program participation does grow, NFIP's financial
footing will become still more precarious, since it will have to
subsidize a greater number of policy premiums.
Lost and found, lost and found
While many people drop their flood insurance policies or never
buy them in the first place, others have used them like home remodeling
services. A National Wildlife Federation analysis of NFIP data between
1978 and 1995 found that a small fraction of total policies made
multiple damage claims. These policies, dubbed "repetitive-loss
properties," represented only 2 percent of insured properties
but accounted for 25 percent of loss claims and 40 percent of NFIP
payments. In Minnesota, for example, 46 properties made 137 loss
claims totaling over $1.6 million. FEMA officials currently report
that North Dakota has 192 repetitive-loss properties, Montana 40
and South Dakota 56. Nationally, the cost of claims by multiple-loss
properties has totaled over $2 billion, constituting a "major factor
contributing to the financial difficulties" of NFIP, according to
Bad maps mean bad rates
A mark of the fundamental nature of NFIP's problems is its difficulty
in accurately estimating program participation rates. It knows exactly
how many policies it's sold, but no one knows the total number of
structures in floodplains. Dams and levees change the floodplain,
as do new housing developments, businesses, public buildings and
infrastructure alterations, but these changes aren't accurately
reflected in NFIP risk rates. According to a May 2001 GAO report,
about 63 percent of the nation's floodplain maps are at least 10
years old, a problem that seriously undermines credibility when
floodplain managers talk to local officials about flood mitigation
strategies. More to the point, outdated floodplain maps make accurate
risk assessment impossible and blunt attempts to market flood insurance
to those who need it. Efforts are under way to update the maps,
but their completion will take years.
Without accurate floodplain maps, NFIP also can't set premiums—subsidized
or not—that correspond to risk. Therefore, notes Lester Lave,
professor of economics and finance at Carnegie Mellon University,
they "don't do a very good job of making the insurance actuarially
fair. So if you live at the edge of the 100-year floodplain [with
a 1-in-100 chance of being flooded in any given year], you basically
pay the same insurance rate as somebody who lives in the five-year
floodplain." High-risk people, in other words, would pay little
more than low-risk people, and the latter—reasonably enough—will
be less likely to pay their premiums, a problem economists call
Regardless, the rates are often too high for many to afford, especially
for those without subsidized premiums. Some floodplain residents
along the Mississippi "may have a house that's worth $30,000
and the premium per year might be $2,000 or $3,000," observed
Heinrichs, "and they're not willing to pay that kind of premium.
They'd rather just pay for the flood damages as they occur. It's
a real problem."
And indeed, why pay for insurance? Some who don't sign up undoubtedly
believe they can rely on the government to bail them out after the
next flood. "I'm just amazed at the multiple layers of assistance
available," noted Rep. DuWayne Johnsrud of Wisconsin's 96th
District, much of which lies along the Mississippi River. "There's
flood assistance available through everybody ... there's FEMA, the
state, county, Community Action, SBA, it just never ends. They all
have their little special flood-help deal. ... Why get the insurance
when you've got all those other things? So, government doesn't really
discourage you from living there."
While government aid programs are actually far more restrictive
than that, the perception that government will come through in times
of need has created a situation that economists call "moral
hazard"—excessive risk taking in the belief that protection
is in place. It's like driving more aggressively because you're
convinced your anti-lock brakes and air bags will stop your car
and save your life. If floodplain dwellers believe the government
will bail them out of disasters, they may be more liable to put
themselves in harm's way, less apt to insure themselves against
loss and less likely to protect their homes through elevation.
"If people aren't actually protecting themselves because they
think the federal government will help them," observed Howard
Kunreuther, co-director of the Center for Risk Management at Wharton
Business School, then "it's the worst of all worlds,"
because government protection is not going to come through. Or will
Tough love or flexible Feds?
For NFIP to succeed as a risk management tool, it has to be coordinated
with zoning regulations that require people to take steps to reduce
flood risk—by elevating their structures, for example, or at
least not substantially increasing the value of their floodplain
properties. But local authorities have usually been reluctant to
enforce these requirements, out of fear of losing their tax base
and perhaps out of sympathy with residents vis-a-vis regulators.
"There is the 50 percent rule that says you cannot improve
your property more than 50 percent of the current assessed value,"
noted Johnsrud. "But not everybody's watching everything, and
all of a sudden you've got a little shack that turns into a three
bedroom snazzy home. ... Then someone has to enforce that law. In
my area, [it's difficult] to find a jury that will convict you.
You just can't get a court in this area that will say, 'Yeah, you're
illegal and you're guilty.'"
"The enforcement is not nearly as good as it should be, in
terms of building codes and zoning regulation," observed Wharton's
Kunreuther. Despite our deepest resolves to stay tough, we all tend
to bend rules in times of emergency. It happens to federal legislators
as easily as to local juries. "I think it's very, very hard
for politicians not to respond to somebody who's in trouble,"
noted Carnegie Mellon's Lave. "It almost seems mean-spirited
for you to say, 'Hey, look you guys, you could have bought the insurance
and you didn't.'"
So politicians tend not to say no, and FEMA or the US Department
of Agriculture or the Small Business Administration or all three
are given another ad hoc appropriation to help people in need. It's
a problem known to economists as "time inconsistency"—adopting
a firm policy at one point in time, but not carrying through on
Even the Federal Reserve is not immune to the problem. In 1997,
in response to the floods that afflicted Minnesota, North Dakota
and South Dakota, the Federal Reserve Board issued a statement saying
that banks it oversees may find it appropriate to "ease credit
terms" to help borrowers restore their financial strength,
and it considered waiving its appraisal regulation for real estate-related
transactions affected by floods.
Numerous steps have been taken to tighten and improve NFIP since
its inception—far fewer policies are subsidized than when it
began, and policy purchase requirements are better enforced, for
example—but it remains a troubled program. As Carnegie Mellon
economist Lave observed, "Every time I hear that things are
getting better over time, we then have a flood and there's another
statement about all the people who aren't insured. ... We thought
we had it solved in terms of the legislation but there's no will
Kunreuther agreed. "The issue in terms of subsidized policies
without the land-use regulations and controls," he said, "makes
the problem a challenging one."