Private vs. public flood insurance rates: Is there a national flood insurance subsidy

The National Flood Insurance Program (NFIP) is a federal program that allows property owners in participating communities to purchase insurance against losses from floods. Revenue for the program is generated through insurance premiums. However, the amount of revenue collected for a given year is often unable to cover yearly flood losses. It is a particular problem during a catastrophic year, like in 2006, where losses were very high due to Hurricanes Katrina, Wilma and Rita.; The NFIP claims that the premiums it collects for certain buildings represent actuarial rates, ensuring that the premiums paid on these buildings reflect their actual flood risk. Some critics argue that this is not the case and cite the federal government's contradictory argument on actuarial premiums. The federal government states that flood risk is uninsurable and would not be feasible for a private insurer, however; they can manage to provide flood insurance at an actuarial rate. Of additional note, private insurers, such as Lloyd's of London, do write policies for what appears to be a significantly higher premium.; The coastline of North Bethany Beach, Delaware provides a natural experiment to compare premiums designated by private insurance companies to premiums designated by the NFIP. It is a checker-boarding of areas that are not eligible for federal flood insurance, must purchase private insurance, along-side areas where federal flood insurance is available. Given that homeowners in this area arguably face an equal amount of risk, it could be deduced that they should pay similar premiums despite their provider. This study examines whether or not a hidden subsidy exists to actuarial premiums provided by the NFIP.