Insuring Risk: National Flood Insurance Policy & Moral Hazard 1

IMG_1485In a previous post I talked briefly about some problems with FEMA’s flood insurance rate maps (FIRMs) that have been salient in the news recently. In a series of posts beginning with this one, I’m going to talk at somewhat greater length about the National Flood Insurance Program and efforts to reform it – including updating and otherwise fixing the FIRMs mentioned in the earlier post.

The worst natural disasters in American history, in terms of both the number of lives lost and the dollars of property damage, have been floods. This is due in large part to the increased populations and the increased concentration of capital in flood-prone areas. The spatial and temporal pervasiveness of flooding has led to federal government involvement in flood mitigation for most of America’s history. The history of American flood mitigation policy, unfortunately, is marked by failures. The National Flood Insurance Program (NFIP) is one example of a long-standing policy failure, despite several attempts to incorporate lessons to address its failings. In July of 2012, however, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012, which promised to meaningfully reform the NFIP.

The Army Corps of Engineers has been dredging harbors and rivers since the 18th century, and has been maintaining levees at least since the Civil War. Arguably the first sustained, non-infrastructural foray into non-levee flood disaster mitigation came on the heels of Hurricane Betsy, which struck the Gulf Coast in 1968, however. Betsy left 76 people dead and did more than 1.5 billion dollars in property damage (roughly 10 billion in 2010 dollars). One issue that Betsy highlighted was the tremendous gulf between flood-risk liabilities and flood insurance coverage. That is, the vast majority of the homes in the Gulf region, and indeed, the nation as a whole, that were at risk for flood damage did not carry flood insurance.

The absence of private-sector flood insurance was cited by many as a “market failure” in desperate need of governmental correction. Private insurers generally see catastrophe insurance as bad business due to the high concentration of risk, leading to low or nonexistent losses in some years but to astronomical losses in other years. Additionally, the areas that most need flood insurance (coastal areas prone to hurricanes and alluvial valleys) are, by definition, those areas at greatest risk for flooding. This makes it extraordinarily expensive to balance premiums and losses while also keeping premium rates affordable (that is, virtually the entire universe of cases needing flood insurance are those at high risk for flood damage, as opposed to something like fire risk which is diffuse, and thus, much easier to insure against). In essence, there was no market for private-sector flood insurance because premiums incorporating actuarial risk were prohibitively expensive and because the risk pool was not large enough to diffuse costs. In a way, however, this was (or should have been) precisely the point. Prohibitively expensive insurance should have disincentivized building and investing in these high-risk, flood-prone areas.

Still, actors in the federal government determined it was desirable to significantly extend the scope of flood insurance coverage in the United States via the National Flood Insurance Act of 1968. This act established the National Flood Insurance Program (NFIP) in an effort to make affordable flood insurance available to those who needed it. The only way to provide “affordable” insurance, of course, was to discount actuarial risk by subsidizing the insurance. NFIP was designed to create voluntary partnerships between the federal government and local communities. NFIP created flood maps (those FIRMs now maintained by FEMA) in these cooperating communities, designating risk in flood zones. Property owners in these participating communities were eligible to buy subsidized federal flood insurance. Properties located in one-hundred year floodplains (that is, those that have a one-percent risk of flooding in any given year) are designated as high-risk (Special Flood Hazard Areas, or SFHAs, in the terms of the program). Additionally, participating communities are monitored on their efforts to mitigate flood risk through drainage and levee improvements, among other things.

The entire National Flood Insurance edifice is built on the foundation briefly described above. Its designated purpose is still to provide “affordable” flood insurance to individuals and firms facing high flood risks. NFIP has faced serious problems from the very beginning. I’ll talk more about some of the problems in the next post in this series. One problem worth noting here concerns the problem of “moral hazard.” That is, by making insurance “affordable” in these high risk areas, NFIP has actually contributed to the concentration of people and capital in flood-prone areas. In insurance, this is called a “moral hazard.” The effects of this moral hazard are serious, and will quite likely be long-lasting. That is, 45-plus years of perverse incentives have led to a significant concentration of people, and thus homes and businesses, in flood-prone areas. Entire communities have developed in areas such as St. Charles county Missouri where no development is safe from recurrent flooding. As such, there is now a very substantial (if geographically dispersed) population of people who benefit from the status quo, and who will likely resist any changes to those policy structures from which they benefit. Thus, NFIP not only suffers from significant design flaws, but its very nature promises to impede reform.

If you’re interested in assessing the risk you personally face (at least, the risk as measured by FEMA and/or the Army Corps of Engineers), you can follow the links here.

Colorado: Day 2 and Day 3

Yesterday I spent much of the day reading about various facets of the floods, and getting a “lay of the land” here Boulder — something I normally do before I head out to do research, but thanks to the juggling back home had to wait till I got here. With some help, again, from Celeste as well as comments from a few of her colleagues, I am getting all sorts of ideas for blogging about this disaster during recovery. Property issues, as always, remain foremost in my mind, but there are a few things intersecting with property that I’ll be exploring. As I work through these issues, I hope the many people I’m meeting here in Boulder will feel comfortable emailing me ( or contacting me via twitter (@LJH1969) with ideas.

Before continuing, I want to say a special thank you to the group of students who met with me this morning in the Women and Gender Studies department here at CU-Boulder. We had a nice discussion and they gave me plenty of food for thought (which is reflected below). I sincerely hope that if any of them are reading this right now, they will feel comfortable emailing me with ideas or anecdotes as they pop up. And thanks to Celeste Montoya for setting that conversation up for me!

In the meantime, some things I’m exploring:

First, the change in course in the St. Vrain remains a special interest. That it re-routed itself through neighborhoods and that there are questions concerning whether it should be put back on its original course are policy questions that will impact homeowners and other property owners — but I’m also interested in the idea that we think we can control where a river runs. Or should control where a river runs. Along the Mississippi, we’re used to hearing the Corps describe its “river training structures.” It’s also common to hear people anthropomorphize the river in statements such as, “Old Man River will do what he wants.” The point being, it’s hard to control a force of nature. I’m curious to know more about the history of the St. Vrain, whether such a course redirection has happened before (during a flood, perhaps?), and what the natural history as well as the human history of the area can tell us about all of this.

For those of you who read the post from the first day in Colorado, I thought you might find this YouTube video of Longmont during the flood of some interest. If you look carefully, you’ll see some of the same areas I photographed.

Second, this morning the students I met with gave me several ideas. One of their chief concerns, perhaps not surprisingly, has to do with the way landlords are handling the damage to rental properties, price gouging, and the complexities of making FEMA claims among roommates. While many don’t think of renters as property owners, they do in fact have some form of property in their leases and rental agreements. Which means they do have rights.

Of course, this becomes complicated when more than one person is living in a home. Imagine how much more complicated this becomes when you’re parsing disaster damage claims among several young people, all of whom are juggling school and jobs, some of whom may or may not be on the lease as the official renter. Figuring out how to hire a lawyer, finding the money to do so, and then taking the time to deal with the situation is a bit overwhelming.

Imagine, too, what this would be like for someone who is not a student, but is renting, juggling child-raising (possibly as a single parent, or with a spouse who is also having to work) with a job or maybe two, and trying to figure out how to get a landlord to fix flood damage. I want to understand these dynamics a little better, and will be looking into the programs and processes set up to help renters through this process.

There is a series of YouTube Videos made by bouldercoloradogov that might of be of interest to anyone who is concerned with these issues. They are recordings of hearings held with the city council, and include information concerning renters rights, mediation services for landlord/tenant disputes, and other interesting issues. For those of interested in politics and law, they are also full of street-level bureaucracy and the politics of property.

The students and I also discussed some of the issues that arose with the homeless population in the days following the flood and gave me some great ideas about how to pursue questions concerning not only property owners but those who are propertyless. By homeless, here, I mean those who were without homes before the floods. Many of the public spaces where they slept or spent time were badly damaged in the flooding. While there are shelters set up, I would like to know more about what is happening to some of our most vulnerable population.

FEMA fraud as well as other criminal activities have also been mentioned to me more than once in the last couple of days. Taking advantage of the situation or taking advantage of victims of the situation appears to be, as it often is, a feature of the post-disaster context here in Boulder. We also discussed, ever so briefly, FEMA maps and flood insurance — that is going to be a perennial issue here at DPP. For those of you interested in flood plain mapping, here’s the Boulder Flood Plain Map:


While I’m thinking about all of these things, I’m also planning to visit a couple of other communities that were hit hard in the mountains. This is a little complicated given that so many of the roads remain closed. But I’ll see what I can do.