Replacing incomplete markets with a complete mess: Katrina and the NFIP

Abstract

PurposeThe purpose of this paper is to elaborate the stated goals of the National Flood Insurance Program (NFIP) and then demonstrate that in practice those goals have not been achieved, and at significant cost to US taxpayers.Design/methodology/approachThe objectives are achieved by describing statements of the NFIP and the legislation behind it, and then providing an analysis of the NFIP in practice in the wake of Hurricane Katrina.FindingsThe NFIP flood insurance primarily shelters lending institutions rather than flood victims. At subsidized rates, premiums covered little of the Katrina‐based claims, and future premiums cannot realistically be expected to repay off the resulting debt to the US Treasury.Research limitations/implicationsIf the findings are accepted they lead one to conclude that government attempts to complete incomplete markets are fraught with inherent and exceptional difficulties.Practical implicationsThe NFIP should be eliminated, allowing private insurance to be offered when profitable in floodplains and allowing property‐owners to make informed choices as to residence and development.Originality/valueAttention to general disaster relief and the controversies surrounding private insurers and homeowners policies following Katrina have overshadowed the NFIP's federal flood insurance failings. This paper contributes to that relative void.