For the first time in a decade, the state of Texas was the target of a massive hurricane. Harvey was first a tropical storm depression, but it transformed into a Category 4 hurricane when it made landfall. Experts are beginning to crunch the numbers, and the estimates are that it will take Texas a long time to rebuild. As the southeastern region of Texas continues to be pummeled by heavy rainfall, analysts project that billions of dollars worth of damage has taken place. The numbers are still being calculated, but the cost will inevitably overwhelm the National Flood Insurance Program (NFIP), a financially strained government-managed initiative.
Insurers in the Lone Star State are bracing for a tidal wave of claims in the aftermath of Harvey. According to AIR Worldwide, a catastrophe modeling firm, insured losses are projected to be $2.3 billion. JPMorgan predicts the eventual losses from Harvey will be at least $10 billion and could surge to as high as $20 billion in the coming days.
Simply put: Harvey will be on the top ten list of costliest hurricanes in U.S. history. Thankfully the death toll has been limited with only 14 dead.
And this does not bode well for the NFIP because most of the damage has been from flooding. Moreover, just 20% of Texas homeowners have flood insurance, prompting the insurance industry to predict a lot of uninsured losses – damage from just a single inch of water can top $20,000 per home.
The federal government program, which is managed by FEMA, is the primary source of flood insurance for most Americans. Today, the NFIP insures approximately six million homes, most of which are situated in Florida and Texas, and has paid more than $60 billion in claims since 1978. Because it is covering the cost of servicing previous natural disasters, such as Hurricanes Katrina and Sandy and multiple other flooding events, it’s $25 billion in the red, and the total will likely balloon. In fact, Harvey may even cause the NFIP to approach its $30 billion borrowing limit.
Over the years, the NFIP has borrowed money from the U.S. Treasury just to stay afloat and fulfill its intended mandate. The debt is scheduled to be paid back next month, when Congress votes to reauthorize the insurance package on September 30. Due to the urgency of the situation, representatives may need to muster up a quick reauthorization before the deadline.
Since 2006, the Government Accountability Office (GAO) has added the program to its “High-Risk List”:
[The] lack of sufficient [NFIP] revenue highlights what have been structural weaknesses in how the program is funded. Since the program offers rates that do not fully reflect the risk of flooding, NFIP’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses.
Washington has already warned that the NFIP will be unable to repay its debts. This has many officials calling for major reforms so that it does not have to experience structural debt accruals whenever a natural disaster occurs. Considering how slow the government is to react to serious problems, whether this happens or not remains to be seen.
To say that the NFIP and FEMA have been boondoggles would be an understatement.
Critics say that the government subsidized insurance measure produces unintended consequences. For instance, the Taxpayers for Common Sense notes that the NFIP fosters building and rebuilding in susceptible coastal areas and floodplains, with some covered properties being flooded dozens of times without their premiums rising.
The government should get out of the business of insuring properties in flood-prone areas. This should be left up to the private sector, and it would yield much better results. The poor and middle class would not want to live in these parts of the country, while the rich would pay for their own private insurance and establish a more exclusive spot. In addition, local governments would not be beholden to the federal government’s bureaucratic red tape.
Most important of all: the moral hazard would be substantially reduced.
The ineptness of FEMA has been showcased since Hurricane Katrina, and it continues to be displayed each time there is a natural disaster. Yes, it can be hard to manage people and equipment when buckets of rain are pouring from the heavens, when 100mph winds are pounding bodies and when bystanders are shouting for help. But this is what the $14 billion federal agency was designed to do: effectively handle emergencies.
Over the last few days, we have been inundated with reports of civilians helping each other, the private sector swooping in to assist their fellow man and state agencies doing their part. FEMA’s leadership just seems to care about spending and increasing its budget and receiving good press. And the media seem to care only about bashing President Donald Trump and First Lady Melania Trump’s shoe choice.