No, the problem is that the insurance company can't average out this risk. Going without insurance is an all-or-nothing proposition - either you lose your hous

No, the problem is that the insurance company can't average out this risk. Going without insurance is an all-or-nothing proposition - either you lose your house, or you lose nothing. By contrast, insurance companies average this out - they lose X% of houses each year, and charge enough to make a profit. But insurance in a flood plain is different. The insurance company can't average out the risk - either they lose all of the houses they're insuring, or none of them. Thus, they can't provide any averaging benefit to the consumer - they have to charge an exorbitant amount to ensure they don't go bankrupt if the flood happens the year they open their doors. The government _can_ handle this, because they are, in a sense, diversified across industries.