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The main problem is that it doesn't really function like private insurance. It does NOT assess flood risk for EACH property; instead, premiums reflect average historical losses within a property’s risk zone. Moreover, the floodplain maps determining a property’s risk zone are often several decades out of date. As a result, premiums may bear NO relationship to the true risk of flooding. The cost of an federal policy averages about half of what would be a market rate. Congress actually mandates this inaccurate pricing method. In 2014, it hastily revoked a few tentative steps at reform after constituents complained loudly when they tried to charge something approximating market rates for flood insurance.

Who benefits from flood insurance? People in flood-prone Gulf states like Louisiana and Florida, of course. But many beneficiaries also share another characteristic: they are upper income. The program does not charge nearly enough to cover the expected costs of its liabilities. The assessments are not sufficient to build any buffer to cover an extraordinary year, such as what occurred with Hurricane Katrina in 2005 or Hurricane Sandy in 2012. Because homeowners don’t incur the full cost of building in a flood zone we end up with more houses there than if homeowners incurred the full cost of the flood risk, which exacerbates the government’s costs in the next disaster. The optimal solution would be for the government to get out of the flood insurance business entirely and leave it to the private market, which would endeavor to accurately measure risk and charge a price for its insurance that covers the expected costs. Smart reforms would also help Congress refrain from throwing money at disasters, bailing out homeowners who shouldn’t have built in flood-prone areas to begin with. Sensible long-run incentives to mitigate damage would discourage such homebuilding by exposing homeowners and businesses to the real cost of building in floodplains.