by Carolyn A. Dehring, Martin Halek
Cato Institute
July 24, 2014
Houses built under Federal Emergency Management Agency (FEMA) guidelines suffer more damage than did pre-guidelines houses. The National Flood Insurance Program (NFIP), which provides federal flood insurance to property owners in participating communities, is currently $24 billion in debt. NFIP regulations may create a perception of safety or transfer responsibility away from the homeowner, which may lead to moral hazard by inducing risk taking behavior. Given that houses built up to FEMA code sustain greater damage than pre-code houses, and that the availability of flood insurance may encourage citizens to build houses in unsafe areas, it is likely that NFIP will only lose more money in coming years. This can only be avoided if changes are made to the FEMA building codes, the incentive structure promulgated by NFIP, or both.

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