A series of powerful storms, including Hurricane Katrina in 2005 and Hurricane Sandy in 2012, led to claims that exceeded the premiums collected, forcing the program to borrow from the Treasury. The 2012 reforms were designed to roll back the subsidies slowly so that property owners wouldn’t absorb the full brunt of market-based premiums in a single shot.
Nevertheless, some homeowners living in the riskiest areas suffered sticker shock. Also, homeowners’ new inability to pass on subsidized coverage for vacation houses has put a damper on the real estate markets in the coastal resort communities of New Jersey, New York, Florida and elsewhere.
Delaying the changes until 2018, as the Senate acted to do (by a 67-32 vote), is no answer. Four years from now, the same constituency opposed to ending the subsidies today will clamor for further delay. President Barack Obama has indicated that he opposes the Senate’s bill, though if it passes by a similar margin in the House it would be veto-proof.
A compromise is needed. Rather than delay the start of phasing out subsidies, Congress should consider adopting a slower pace of rate increases, perhaps tracking the average length of homeownership in a community. Unfortunately, the Senate has already rejected a proposal to limit premium increases to no more than 25 percent a year.
Federal and state governments should also investigate setting up well-funded catastrophe pools to help secure the flood-insurance fund, perhaps by offering stronger financial backstops for reinsurance — essentially the insurers who sell protection to insurance companies.
Of course, the next megastorm might swamp even these measures. Indeed, economists are in broad agreement that the most cost-effective way to avoid future losses is for government to pay for elevating some properties and to buy out others. For every $1 spent this way, the U.S. Treasury would save $3.65 in costs, studies have shown.
As sea levels rise, the threat of coastal flooding grows. Four years of inaction now, as the Senate bill envisions, will only dig a deeper hole for taxpayers to fill.