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Policy Report

Watery Marauders
How the Federal Government Obstructed the Development of Private Flood Insurance


     
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How did America’s National Flood Insurance Program came into existence and why didn’t private flood insurance develop in the United States on a significant scale?

Lehrer provides a brief theoretical framework for thinking about flood insurance by describing what flood insurance does and how it ought to work. Then he discusses the early history of the flood insurance program. He outlines how the federal government first took on the responsibility of protecting the nation from flooding and how Congress failed in its first effort to offer federal flood insurance. Finally the author explains how America got the system of flood insurance that it has today; how the Tennessee Valley Authority, U.S. Geological Survey, and a variety of local governments gathered enough risk data to make federal flood insurance palatable to Congress; and how Congress implemented a program with some risk-based characteristics and then stripped it of its risk-based character.

The federal government built levees that altered America’s natural landscape and thus increased flooding, discouraged market entry by failing to repeal a calamitously impractical flood insurance law that was never implemented, supported mapping and zoning efforts that exacerbated flooding problems, and created a flood insurance program that priced policies well below market levels. Flood insurance exists as it does because political institutions sought to “correct” a perceived market failure and thereby made the emergence of private insurance unlikely, if not impossible.

Lehrer concludes: Flood insurance, in its current form, did not emerge as a result of market failure. Instead, the current situation represents an example of what economists call “government failure.”

Other Insurance Choices policy reports


Eli Lehrer is a Research Fellow at the Independent Institute and President of the R Street Institute. He is a contributing author to the book Risky Business: Insurance Markets and Regulation.


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