When the term National Flood Insurance is spoken or even thought of, it is often associated with benevolence, protection, and wisdom. However, none of those things should be associated with National Flood Insurance, which in and of itself is a big misnomer.
First of all, the insurance program is funded by taxes. Because taxation is coercion, it is wrong, it violates individual rights, and thereby discords with liberty. When fancy, expensive beach houses flood, taxpayers in the desert, even the poorest ones struggling to put food on the table, have to foot the bill, which is totally unjust. Therefore, National Flood Insurance cannot, nor should not, be considered benevolent. Rightfully so, there is no federal insurance program protecting desert dwellers from sandstorms or rattlesnake bites to which beach residents would be forced to pay. Therefore, the righteous thing to do would be to end National Flood Insurance, and don’t stop there, end all federal insurance programs.
Insurance is meant to measure and price risk. An insurer assesses risk, offers a premium to the marketplace of customers based on that assessed risk, and matches with those customers who agree upon the premium charged by the insurer. Voluntary free-market insurance, as opposed to federal government insurance, discourages risk. For example, if a customer is risk prone, then an insurer would likely charge a high premium to offset the risk. This high premium, in turn, could signal and encourage the customer to become less risky, especially considering that the taxpayers won’t be forced to pay for disaster recovery and the customer will not earn the insurance that he/she desires. Through this voluntary exchange and negotiation, the moral hazard is removed and prudence is rewarded. However, with national flood insurance, the moral hazard is not absent; in fact, it is dominant, which is why it is unwise and fails to protect against the risk of floods which runs counter to its stated purpose.
With national flood insurance that isn’t paid through voluntary premiums, but rather through taxes, which is commonly and wrongly believed to be free, people have every reason to be risky, specifically by buying and living on or near high flood risk zones(HFRZs). After all, if I’m already paying taxes and don’t have to pay an extra premium for flood insurance, there is nothing to lose by engaging in risky behavior i.e. living in HFRZs. Therefore, if a flood does occur, I don’t have to incur an extra expense as the taxpayers, even the low-income desert dwellers, will be on the hook for my reckless behavior. Furthermore, because the residents of HFRZs receive federal insurance funds and believe they will continue to receive those funds in the next catastrophic incident, those residents will rush back into the HFRZs rather than doing the right thing: moving to less risky areas to live. This in turn perpetuates, rather than remedies, risk, the opposite of what insurance is meant to do.
Now some may say well flood insurance is so expensive, which warrants the National Flood Insurance. To that I first of all say, even if it can be measurably proven that private flood insurance costs exceed that of its federal, taxpayer funded, counterpart, the increased recovery payouts from higher catastrophic risk and higher incidences more than offsets any cost-saving,which again is questionable at best, in that regard. Furthermore, as many different insurers compete for customers, one of the following two things would likely happen:
-Premiums would be pushed downward to an equilibrium minimum in order to meet customer demand.
-In order to entice customers to pay higher insurance premiums than the above explained equilibrium minimum, insurance recovery payouts would have to be pushed higher.
The most likely result is that there would be two different types of voluntary and private insurance policies from which to select, broadening the choices for the customers, rather than limiting them and unjustly forcing taxpayers to be on the hook. As competition develops among insurers, the cost of insurance would likely reach a lower point than the taxes, which also aren’t guaranteed to either remain constant or decrease, paid to fund the existing National Flood Insurance program,
This is why National Flood Insurance, as well as all federal insurance programs, is an overall bad idea and should therefore be eliminated.