Why The Government Sells Flood Insurance Despite Losing Money

Sep 13, 2017
Originally published on September 13, 2017 8:05 am
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After hurricanes Harvey and Irma, as residents in Texas and Florida look to rebuild flooded homes, they'll likely turn to the nation's one and only large flood insurance provider - the U.S. government. In this encore story from David Kestenbaum from NPR's Planet Money podcast, we find out how the government ended up in the flood insurance business at all.

DAVID KESTENBAUM, BYLINE: There is a quick one-word explanation for why the government started selling flood insurance - Betsy.

WINDELL CURALL: Hurricane Betsy hit in 1965, September 9.

KESTENBAUM: Windell Curall runs a local levee district in Louisiana. Windell's family lived south of New Orleans, a place he describes as half land, half water. His family had lived there for generations. And on that day in 1965, something like 30 relatives came over to take refuge.

CURALL: Uncles, Aunts and first cousins. And they came up to, I say, the high country. They left land that was about 3 feet above sea level to come to our house, which was about 5 feet above sea level.

KESTENBAUM: The storm became known as Billion-Dollar Betsy. Homes were ruined. Water up to the roofs. People paddling around the streets in boats - all that stuff - massive damage. And this would be the time when you'd expect people to be pulling out their flood insurance policies, but they couldn't. Flood insurance was really hard to come by. You could get fire insurance, theft insurance, health insurance, car insurance, life insurance but not flood insurance.

Eric Smith works in the insurance industry. He's president and CEO of Swiss Re in the Americas.

ERIC SMITH: There was a lack of data. One of the principles - the bedrock principles of insurance is it's got to be something that's somewhat measurable. You have to be able to calculate its frequency and its severity. And, you know, how often is this going to occur and how much damage will it do?

KESTENBAUM: A few years after Hurricane Betsy in 1968, the government decided it would take on the job of selling flood insurance. Some people hated this idea. If private insurance companies wouldn't sell policies to people who wanted to live in flood zones, why should the government? That argument did not win the day. The government created flood maps, gathered data and set up the National Flood Insurance Program.

MARK BROWNE: I think it generally worked out OK overall until Katrina.

KESTENBAUM: Mark Browne is a professor of risk management and insurance at the University of Wisconsin, Madison.

BROWNE: Katrina came - and Katrina was a major loss for the National Flood Insurance Program - blew through its money and went into deficit.

KESTENBAUM: This, frankly, is the other reason why flood insurance is a tricky business. You could have a quiet three decades, 30 years, and then - bam - a huge hurricane plows into a major city. Suddenly, you've got to pay out all this money. And on the heels of Katrina there was, you may remember, Rita and Wilma. The National Flood Insurance Program had to borrow money from the government - a lot of money - $17 billion.

BROWNE: That's a lot of money to borrow (laughter). That's exactly right.

KESTENBAUM: The debt got worse after Sandy. So were the critics right? Is the government running a bad business? Mark Browne says maybe that's the wrong way to look at it. After a big national disaster, the government is on the hook anyway. It might as well collect some money by selling insurance. And all that money the program had to borrow - the plan is to pay it back. It could take 20 or 30 years.

David Kestenbaum, NPR News.

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