Rethink Real Estate: Eliminate some rate subsidies from the National Flood Insurance Program

Clarksville, TN
Federally subsidized flood insurance makes it easier to build homes in flood-prone areas. Image via Wikimedia.

This is the first in a series of posts discussing recommendations from our new platform Federal Investment in Real Estate: A Call for Action. The series will highlight what is lacking in current federal real estate policy and how our recommended improvements could generate better returns for families, communities and taxpayers.

The National Flood Insurance Program (NFIP) is intended to provide property owners and renters with a way to financially protect themselves from flood damage. Administered by the Federal Emergency Management Agency, the NFIP works closely with nearly 90 private insurance companies to offer flood insurance to homeowners, renters and business owners.

Property owners and renters covered by the NFIP pay highly subsidized insurance rates. These subsidized rates do not reflect the true risk of flooding or the costs associated with it, which unfortunately has contributed to increased development in flood hazard areas. That puts more people and property at risk, and it puts American taxpayers on the line for larger flood-related liabilities. At present, the NFIP is nearly $24 billion in debt to the Department of the Treasury.

Congress has recognized the fiscal danger these subsidized rates pose to communities and to taxpayers, and passed legislation in 2012 to mitigate the problem. However, this legislation did not go far enough to disincentivize development in flood plain areas.

As part of our call for real estate reform, Smart Growth America recommends phasing out a portion of NFIP rate subsidies so that insurance rates better reflect the true risk of flooding. Rates should be risk-based and subsidies should be means-tested in order to ensure assistance goes where it will do the most long-term good. In addition, low-income families should receive targeted assistance, and mitigation funds should be used to help nationally targeted communities develop innovative flood mitigation strategies to achieve affordable, accessible and self-sustainable outcomes. Through these adjustments, the NFIP will be in a better position to support economic resilience in the communities it helps. We estimate that this strategy could save $8 billion over the next 10 years.

This proposal is one of seven recommendations included in Federal Involvement in Real Estate: A Call for Action. Read more about the recommendations or take action and tell Congress it’s time to rethink real estate.