As he frames it, this insurance program illustrative of the challenge of taking a clever policy idea and translating it into a successful program. Between idea and action are politics and administration, both of which are critical to the success of a policy.
NFIP, Lehrer writes, was set up to contend with “a clear market failure.”
Before Congress set up the NFIP in 1968, only a handful of very small insurance companies wrote flood coverage as part of conventional homeowners’ policies. Although a demand for flood insurance clearly existed, nobody would sell it. This was a market failure as almost any economist would describe it [….]
On paper, the flood insurance law passed by Congress in 1968 looked sensible: It required participating communities to take steps to avoid building in disaster-prone areas, left requirements loose enough that private companies could take on risk if they wanted to, assured that rates on all future construction would be “actuarially adequate,” and promised that the federal government would draw up the maps that the private sector needed in the first place. As an incentive for people to buy the insurance, it denied all federal aid to those who qualified for the program but didn’t buy in. Although its creators allowed it to borrow funds from the Treasury—a stop-gap measure, lest major floods had hit in its first few years—the program was intended to break even over time and, some thought, might eventually be sold off to the private sector.
Yet, Lehrer writes, “By almost any analysis, the National Flood Insurance Program (NFIP)—the recipient of a $9.7 billion bailout in the wake of Hurricane Sandy—doesn’t work. It is poorly conceived, it’s terribly mismanaged, and it encourages harmful behavior.”