Flood Insurance Program Bankrupted by Katrina
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The National Flood Insurance Program has openly admitted that it is hopelessly, um, underwater:
The federal flood insurance program was an intrinsically unstable program that did not "correct a market failure," but rather created one via ongoing subsidies to people living in areas that are prone not just to flooding, but to chronic flooding. A classic moral hazard trap.
Furthermore, the insolvency of the program cannot be blamed solely on the catastrophic nature of Katrina and Rita — private property & casualty companies are in the very business of insuring against catastrophes (including this year's hurricanes), and their financial condition is just fine, thank you very much.
The collapse of the flood insurance program is not comparable to the FEMA debacle — it's worse. FEMA was just typical bureaucratic incompetence and cronyism. Government flood insurance was a fundamentally flawed concept from the outset. It was, no pun intended, a disaster waiting to happen.
Keep that in mind when the next shoe to drop — the Pension Benefit Guaranty Corporation — goes through the same death throes. Ditto for Social Security and state and local government pensions.
The acting head of the federal flood insurance program told Congress yesterday that his agency needs to be allowed to borrow $5 billion more just to cover claims it expects to pay by mid- to late November.You read that correctly: "'borrowing' that won't be repaid." Isn't there another term for that?
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In contrast to past borrowings, [David I.] Maurstad said after a hearing by the Senate Banking Committee, the insurance program has no hope of repaying debt of that magnitude out of premium income. This would mean that most funding necessary to pay claims would have to come from taxpayers, either as "borrowing" that won't be repaid by the agency or as an appropriation.
Until now, when the flood insurance agency has borrowed from the Treasury, it has repaid its loans with interest, Maurstad said.
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Maurstad called the $5 billion in increased borrowing "a stopgap" while fundamental questions about the future of the program are addressed.
The federal flood insurance program was an intrinsically unstable program that did not "correct a market failure," but rather created one via ongoing subsidies to people living in areas that are prone not just to flooding, but to chronic flooding. A classic moral hazard trap.
Furthermore, the insolvency of the program cannot be blamed solely on the catastrophic nature of Katrina and Rita — private property & casualty companies are in the very business of insuring against catastrophes (including this year's hurricanes), and their financial condition is just fine, thank you very much.
The collapse of the flood insurance program is not comparable to the FEMA debacle — it's worse. FEMA was just typical bureaucratic incompetence and cronyism. Government flood insurance was a fundamentally flawed concept from the outset. It was, no pun intended, a disaster waiting to happen.
Keep that in mind when the next shoe to drop — the Pension Benefit Guaranty Corporation — goes through the same death throes. Ditto for Social Security and state and local government pensions.
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Posted by KipEsquire on
19 October 2005
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