Why the Flood Insurance Market should be Privatized?
In the United States, the government of the United States is the biggest player in the flood insurance industry. This has been the case ever since the National Flood Insurance Program (NFIP) was created in 1968. Prior to 1968, many private insurance companies refused to provide private insurance to homeowners who had houses in flood-prone areas. This is the reason why the government decided to form the NFIP via an act of Congress. This body was created in order to provide insurance to owners at subsidized rates.
However, based on the performance date of over five decades, it can be concluded that the NFIP is just as inefficient as any other government organization.
This inefficiency can be gauged based on many facts, some of which have been listed below:
All the above points clearly outline how a government supported monopoly has made the flood insurance market utterly disorganized. The NFIP does not seem like an insurance program at all. Instead, it seems like a program designed to give government-sponsored handouts to homeowners who take unnecessary risks.
Current Role of the Private Sector
The reality is that the private sector is active in the market despite the government monopoly. Private insurance companies still provide ancillary services and sell add-on products.
Future Role of the Private Sector
Various models are being explored to make the private sector more active in the flood insurance market. Increasing the participation of the private sector seems to be the only way to bring more efficiency into the markets. The private sector already has a lot of data on the flood insurance patterns in the United States because of the current role that they play in the issuing and servicing of flood policies. This data will help them make effective underwriting decisions.
In the options that have been explored till now, private insurance companies seem to be keen in providing insurance to the low risk as well as moderate risk areas. However, they are completely averse to providing insurance in the high-risk areas. The government has to be careful in order to ensure that the private sector is not allowed to take all the rewards without bearing the risks. This will make an already bad situation even worse.
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