Criticisms

Prior to the program, property losses stemming from flood damage were largely the responsibility of the property owner, although the consequences were sometimes mitigated through provisions for disaster aid. Today, owners of property in flood plains frequently receive disaster aid and payment for insured losses, which in many ways negates the original intent of the NFIP. Consequently, these policy decisions have escalated losses stemming from floods in recent years, both in terms of property and life.

Moreover, certain provisions within the NFIP increase the likelihood that flood-prone properties will be occupied by the people least likely to be in a position to recover from flood disasters, which further increases demand for aid. This is an example of adverse selection. Some factors contributing to increased demand for aid are:citation needed

• Flood insurance for properties in flood prone areas is mandatory only to secure loans, which makes it somewhat more likely that flood prone properties will be owned by seniors who have paid off their mortgages, or investors who have acquired the property for rental income.
• Flood insurance only covers losses for the owner of the property, and claims are subject to caps, which further increases the likelihood that the property will be occupied by renters rather than the property owner.
• Flood prone properties are more likely to be offered for rent because of the owners' increased risks and/or costs associated with occupying the property themselves.
• Flood prone properties are more likely to be offered for rent at a discount, which attracts lower income groups, seniors, and infirm groups.

According to critics of the program, the government's subsidized insurance plan "encouraged building, and rebuilding, in vulnerable coastal areas and floodplains." Stephen Ellis, of the group Taxpayers for Common Sense, points to "properties that flooded 17 or 18 times that were still covered under the federal insurance program" without premiums going up. Critics say this program is underperforming because it is starved for funding compared to disaster response and recovery, and the process of applying for a buyout is unreasonably slow.

Another criticism is that FEMA doesn't administer all policies, instead outsourcing many policies to private insurance companies. When a disaster occurs, FEMA makes payments to those private insurance companies to offset their costs. However, there is little oversight and few rules as to how the money should be distributed. As a consequence, private insurers have been known to use FEMA payments to hire attorneys that fight policyholders in court. One law firm is estimated to have received US$29M from FEMA payments to fight Hurricane Sandy claims.