In the late 1960s, the federal government set up a national flood insurance program to deal with the failure of the private market for flood insurance. (Failure in the sense that no one wanted to actuarially sound rates for flood insurance.) It was a carrot and stick program to reduce development in areas at risk of flooding. The carrot was the availability of partially subsidized insurance and the stick was the requirement that communities that wanted to participate in the flood insurance program institute land use restrictions to limit future high risk construction. Through time, political pressures made it difficult for the program to enforce the land use restrictions and to charge realistic rates for coverage. Thus a program that was intended to reduce risky development eventually morphed into a program that subsidized risky development. This paper is a good introduction to the program and its legal issues, by an expert:
A recent review of where the money goes:
http://www.usatoday.com/news/nation/2010-08-25-flood-insurance_N.htm
Perhaps not surprisingly, Louisiana is the big winner in the flood insurance game. What is startling is the amount spent on rebuilding in the same high risk regions so that program makes makes multiple payouts on the same house.
Financial report for the first 2 years of the program: