Congress Should Stop Shoring Up Beach Homes

As taxpayer subsidies for the national flood-insurance program began winding down this year, coastal property owners began to complain about bigger insurance bills. With rates rising to reflect the true risk of living in flood-prone areas, some people’s annual premiums rose to several thousand dollars, from a few hundred.

Just as inevitably, then, Congress sprang to the rescue.

Last week’s Senate vote to delay changes meant to bolster the $1.3 trillion flood-insurance program was no surprise. If the House goes along, however, it will only assure that the program, already $24 billion in debt, will have to reach deeper into taxpayers’ pockets.

There are better ways to wean coastal homeowners from a subsidy that undermines sensible policy meant to prevent private losses from floods becoming a burden on the public.

Two years ago, Congress seemed determined to turn things around, passing reforms that, over a five-year period, would have phased out subsidized insurance premiums, eliminated the subsidy for vacation homes upon resale, barred eligibility for those who allowed coverage to lapse and adjusted flood-zone maps to reflect rising sea levels. Because of the gradual phase-in, the reforms assured that only 5 percent of policyholders would be subject to annual premium increases of more than 25 percent.

These subsidies go to properties that have suffered serious damage in past floods or are in flood plains -- many of which are shoreline vacation homes. Although only about 20 percent of the roughly 5 million properties in the flood-insurance program receive the subsidy, the combined value of those that do ($527 billion) amounts to half the total value of all properties covered.

The subsidies have always been, at best, a well-intentioned mistake. Designed in the 1960s to reduce federal spending on disaster aid, the flood-insurance program quickly became a boondoggle that encouraged development on vulnerable beachfronts and sensitive wetlands prone to flooding. It is no surprise that some of the biggest opponents of flood-insurance subsidies, along with fiscal conservatives, are environmentalists.

A series of powerful storms, including Hurricane Katrina in 2005 and Hurricane Sandy in 2012, led to claims that exceeded the premiums collected, forcing the program to borrow from the Treasury. The 2012 reforms were designed to roll back the subsidies slowly so that property owners wouldn’t absorb the full brunt of market-based premiums in a single shot.

Nevertheless, some homeowners living in the riskiest areas suffered sticker shock. Also, homeowners’ new inability to pass on subsidized coverage for vacation houses has put a damper on the real estate markets in the coastal resort communities of New Jersey, New York, Florida and elsewhere.

Delaying the changes until 2018, as the Senate acted to do (by a 67-32 vote), is no answer. Four years from now, the same constituency opposed to ending the subsidies today will clamor for further delay. President Barack Obama has indicated that he opposes the Senate’s bill, though if it passes by a similar margin in the House it would be veto-proof.

A compromise is needed. Rather than delay the start of phasing out subsidies, Congress should consider adopting a slower pace of rate increases, perhaps tracking the average length of homeownership in a community. Unfortunately, the Senate has already rejected a proposal to limit premium increases to no more than 25 percent a year.

Federal and state governments should also investigate setting up well-funded catastrophe pools to help secure the flood-insurance fund, perhaps by offering stronger financial backstops for reinsurance -- essentially the insurers who sell protection to insurance companies.

Of course, the next megastorm might swamp even these measures. Indeed, economists are in broad agreement that the most cost-effective way to avoid future losses is for government to pay for elevating some properties and to buy out others. For every $1 spent this way, the U.S. Treasury would save $3.65 in costs, studies have shown.

As sea levels rise, the threat of coastal flooding grows. Four years of inaction now, as the Senate bill envisions, will only dig a deeper hole for taxpayers to fill.

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