Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
Catastrophe Economics: The National Flood Insurance Program
Journal of Economic Perspectives
vol. 24,
no. 4, Fall 2010
(pp. 165–86)
(Complimentary)
Abstract
Hurricane Betsy, which hit Louisiana September 9, 1965, was one of the most intense, deadly, and costly storms ever to make landfall in the United States: it killed 76 people in Louisiana and caused $1.5 billion in damage—equal to nearly $10 billion in 2010 dollars. In 1965, no flood insurance was available, so victims had to rely on friends and family, charities, or federal relief. After that catastrophe, the U.S. government established a new program in 1968—the National Flood Insurance Program (NFIP)—to make flood insurance widely available. Now, after more than 40 years of operation, the NFIP is today one of the longest standing government-run disaster insurance programs in the world. In this paper, I present an overview of the 40 years of operation of the National Flood Insurance Program, starting with how and why it was created and how it has evolved to now cover $1.23 trillion in assets. I analyze the financial balance of the NFIP between 1969 and 2008. Excluding the 2005 hurricane season (which included Hurricane Katrina) as an outlier, policyholders have paid nearly $11 billion more in premiums than they have received in claim reimbursements over that period. However, the program has spent an average of 40 percent of all collected premiums on administrative expenses, more than three quarters of which were paid to private insurance intermediaries who sell and manage flood insurance policies on behalf of the federal government but do not bear any risk. I present challenges the NFIP faces today and propose ways those challenges might be overcome through innovative modifications.Citation
Michel-Kerjan, Erwann O. 2010. "Catastrophe Economics: The National Flood Insurance Program." Journal of Economic Perspectives 24 (4): 165–86. DOI: 10.1257/jep.24.4.165JEL Classification
- G22 Insurance; Insurance Companies
- Q54 Climate; Natural Disasters; Global Warming
- Q58 Environmental Economics: Government Policy