Hurricane Katrina Demonstrated the Weaknesses of U.S. Flood Insurance

Nearly half the people whose houses were damaged or destroyed by Hurricane Katrina did not have flood insurance, yet the federal flood insurance program did not have enough funds to pay claims worth about $25 billion by those who were insured. This outcome is partly due to the way the program was set up, which in turn has been heavily influenced by vested economic interests.

Real estate developers and mortgage lenders have opposed efforts to require millions more of homeowners to buy flood insurance (and thus put the federal program on more solid footing), because they see it as stifling new housing developments. And even though fierce storms like Katrina are likely to make landfall more often in the future, a post-Katrina effort to revive the program is falling short.

The federal flood insurance program is underfinanced because the government has kept insurance premiums artificially low and has worked with flood maps that exempt many owners from having to buy insurance even though their houses may be vulnerable. Flood maps have not been updated for many years. Two-thirds of the homes and apartments flooded in Mississippi were outside the official flood zones. In New Orleans, 65 percent of flooded homes had insurance, but some areas particularly badly affected did not.

Christopher Drew and Joseph B. Treaster, “Politics Stalls Plan to Bolster Flood Insurance,” New York Times, 15 May 2006.
Link: http://www.nytimes.com/2006/05/15/us/.