After Hurricane Sandy: Is flood insurance bad for taxpayers?

As bills mount for the superstorm, there are growing doubts about the wisdom of National Flood Insurance

Surf rolls past a destroyed roller coaster wrecked by Superstorm Sandy in Seaside Heights, New Jersey.
(Image credit: Mario Tama/Getty Images)

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 Bullock. So 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."

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