CBO Testimony: Budgetary Treatment of Subsidies in the National Flood Insurance Program: Statement of Donald B. Marron before the Committee on Banking, Housing, and Urban Affairs, United States Senate, January 25, 2006 [open pdf - 90KB]
From the statement of Donald B. Marron, Acting Director of the Congressional Budget Office: "Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, thank you for offering the Congressional Budget Office (CBO) the opportunity to discuss issues related to the National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency (FEMA). Established in 1968, the NFIP now includes over 20,000 communities that adhere to certain minimum standards for floodplain management. Within those participating communities, nearly 4.7 million policyholders pay more than $2.0 billion in premiums each year to receive over $800 billion in coverage. By law, some policyholders - primarily those whose properties were built before their local community joined the program - receive coverage at rates that are explicitly subsidized. Lawmakers built those subsidies into the program partly on the grounds that actuarial (full-risk) premiums for many existing structures would be unattractively high. The subsidies have both benefits and costs. The immediate benefits to current property owners encourage communities to participate in the program, thereby reducing future flood losses through improved floodplain management and tighter building standards. Moreover, charging flood insurance premiums, even if they are subsidized, may encourage policyholders to take at least some notice of the risks to their properties. However, subsidized premiums provide less incentive than full-risk premiums would for policyholders to reduce their flood risks - and, of course, they impose costs on taxpayers."
Congressional Budget Office: http://cbo.gov