Why does the government sell flood insurance?
When the National Flood Insurance Program was established in 1968, it was seen as a way to save taxpayers money. Instead of paying out massive emergency funds whenever a coastal area or river floodplain was inundated, the government figured it was more prudent to identify risky areas and force people who lived there to buy insurance and assume some of the risk themselves. But the insurance industry wanted no part of the tricky business of calculating flood risk — "it's like rat poison to them," says insurance industry lobbyist Tony BullockSo the government had to underwrite the policies itself. By law, everyone who has a federally backed mortgage and lives within an area designated as prone to flooding once a century has to buy the insurance. There are currently 5.7 million flood insurance policies, covering $1.27 trillion in property. But critics say the program, part of the Federal Emergency Management Agency, has backfired, creating huge debt for taxpayers even as it rewards homeowners for trying to defy nature. Thanks to federal flood insurance, says Duke University coastal geologist Orrin Pilkey, "we are subsidizing, even encouraging, very dangerous development."

Why is flood insurance hurting taxpayers?
It pays out far more than it takes in. The program currently collects $3.5 billion in annual premiums — a total that falls chronically short. The cost of damage from major hurricanes can be five or more times that, and as sea levels rise, weather becomes more extreme, and the value of flood-prone properties continues to soar nonetheless, massive payouts are becoming more frequent. Many policyholders, moreover, still pay subsidized premiums that reflect less than half of the true risk value. Even for vacation homes with prestigious addresses like Hilton Head Island, S.C., annual premiums are capped at $3,300. Flood claims from Hurricane Katrina alone totaled $21.9 billion, putting the U.S. flood insurance program $18 billion in the hole to the U.S. Treasury. That was before it began processing claims from Hurricane Sandy.

How does it pay for Sandy?
Only by taking on more debt. Sandy is expected to generate up to $12 billion in claims, but only $2.9 billion remains on the flood insurance program's line of credit. That makes it almost inevitable that Homeland Security Secretary Janet Napolitano will soon have to ask Congress to bail the program out again — at a time when all federal expenditures are under intense scrutiny. When Congress voted in July to extend the program through 2017, it eliminated some subsidies and authorized premium hikes of 20 percent per year in high-risk areas, and up to 25 percent per year for vacation properties. But many critics say those reforms are inadequate, and that the government should get out of the flood insurance business altogether.

What's their argument?
Subsidized flood insurance, they say, is a classic example of moral hazard: encouraging people to take foolish risks by relieving them of the cost of bearing those risks. "If we allowed market forces to dictate at the coast, a lot of the development in the wrong places would never have gotten built," said Jeffrey Tittel, head of the Sierra Club's New Jersey chapter. Texas Rep. Ron Paul, a longtime critic of FEMA and no friend of the Sierra Club, agrees. "The market would never provide insurance in flood-prone areas at an affordable price," he said. "If it's a losing proposition, should taxpayers subsidize the inevitable losses?"

What are the alternatives?
One would be to strategically retreat from flood-prone regions in a major way. "Get appraisals for their homes, write them a check, knock the homes down, and just let it go back to its natural state," said Steve Sweeney, president of the New Jersey state Senate. Not surprisingly, Republican Gov. Chris Christie has spurned that approach. "I don't believe in a state like ours, where the Jersey Shore is such a part of life, that you just pick up and walk away," he said. Without insurance subsidies, he and others argue, lower- and middle-class families simply could not afford to live on much of the Jersey Shore, and coasts and riverbanks elsewhere would become even more exclusive enclaves of the ultra-rich.

Don't coastal residents get sick of rebuilding?
They do, but they forget. After Hurricane Andrew devastated South Florida in 1992, property values even in "near-miss" counties dropped sharply, but with time the sense of danger faded. Now far more people live in its path than did 20 years ago. "If you look at it over the long term, people will still be attracted to the water," said Terence Beaty, a real estate market researcher. That eternal attraction will continue to lead people to build close to the shoreline, with or without government insurance. "I certainly love shoreside living," author and Long Island, N.Y., coastal resident Carl Safina recently wrote. "I love walking the beach in the morning with my dogs. I have federal flood insurance, thank you. But really, it's time you considered cutting me off."

The payouts that never stop
Over the years, the federal government has shelled out a total of $2 million to repeatedly rebuild a flood-ravaged home in Humble, Texas, assessed at just $116,000. Another home, in Wilkinson County, Miss., worth $69,900, has been flooded 34 times since 1978 and collected $663,000 in insurance payments. The National Flood Insurance Program has made efforts to stop paying out on such "repetitive-loss properties," which account for more than a third of its costs. But somehow they keep showing up on the books, especially in the Gulf of Mexico states from Texas to Florida. For David Conrad of the National Wildlife Federation, such outlays are the purest example of the folly of flood insurance. "It does seem to fit Albert Einstein's definition of insanity — to somehow expect something different when you do the same thing over and over again."