The National Flood Insurance Program. Problems and Potential

The National Flood Insurance Act of 1968 was designed to provide subsidized flood and to reduce long-term flood damage through the use of land use and control measures. The floods of 1972 and 1973 provided early tests of the program, and it appears to have been deficient in many respects. The author examines these deficiencies and offers reasons for their existence. Various ameliorative actions that were taken and others that have been proposed to improve the program are analyzed. Finally, the lessons learned from this study are used to postulate guidelines for improving existing and future governmentindustry property programs. Providing flood on fixed-location properties has presented perpetual problems for the private industry. Various studies' have led the industry to conclude that, insurance against the peril of flood cannot successfully be written. 2 The principal reasons which have been put forth are the virtual certainty of loss in areas subject to recurrent floods, its catastrophic nature, the reluctance or inability of the public to pay the premium charge required to make the self-sustaining, and adverse selection.3 It has always been felt that since flood damage is confined to relatively concentrated areas, only a limited number of individuals would demand flood and hence create considerable adverse selection. The frequent occurrence of floods in certain areas and their devastating effects result in losses of a catastrophic nature. Spreading these losses over a small number of property owners results in a prohibitively high premium for each individual.4 Dan R. Anderson, Ph.D., C.P.C.U., is Assistant Professor of Risk Management and Insurance in the Graduate School of Business of the University of Wisconsin. This paper was submitted in August, 1973. ' See Parsons, Brinckerhoff, Hall, and MacDonald, Report on Floods and Flood Damage, Prepared for Insurance Executive Association (New York: Parsons, Brinckerhoff, Hall, and MacDonald, April, 1952) and American Insurance Association, Studies of Floods and Flood Damage, 19.52-1955 (New York: American Insurance Association, May, 1956). 2American Insurance Association, Studies of Floods and Flood Damage, 19,52-1955 (New York: American Insurance Association, May, 1956), p. 3. 3lbid., pp. 5-6. 4 It should be noted that the above refers only to the feasibility of flood