The new flood insurance rules, which went into effect on Oct. 1, are intended to make the deeply indebted NFIP solvent by no longer charging government-subsidized rates on homes in flood-prone areas. The hikes will affect about 20 percent of the 5.5 million people who have NFIP policies around the country, as well as thousands more who live in areas that didn’t used to be considered flood-prone but who now must buy insurance under the new FEMA map.
The NFIP subsidized rates have allowed people for years to build in flood-prone areas that, in some cases, probably never should have been built on in the first place. But the feds’ solution to this — hiking up rates over four years until they reach market price — could leave millions of homeowners unable to afford the steep new prices. If these homeowners try to sell their houses, they’ll most likely find it tough to find a buyer, who would inherit the new insurance rates. (People with mortgages are required to purchase the insurance — those who’ve paid off their homes can skip it.)
via news.yahoo.com
For years, the federal government has subsidized flood insurance premiums for people whose homes are built in flood-prone areas. One can speculate as to the motivation (real or otherwise) for the subsidization--those with low income can't afford to build elsewhere, private insurance markets overprice insurance in flood prone areas,...--but one thing is certain: flood insurance priced below the efficient market price will lead to too much construction in flood prone areas. Perhaps worse, if the insurance rates are too low--as was the case with the National Flood Insurance Program--there is an incentive to rebuild in areas likely to flood again.
It seems the federal government learned some lessons after Hurricane Katrina and has decided to raise the price of flood insurance by removing subsidies for rebuilt homes in the wake of Super-duper Storm Sandy. While well-intended, and the right move from an economic efficiency point of view, the removal of an inefficient policy is going to create short-term hardships for a significant number of people.
Don't get me wrong. I applaud the move toward actuarily efficient pricing of flood insurance.
I just feel bad for those who made decisions based on bad policy only to see it changed midstream.
See.
We economists do have feelings.
