As brilliantly illustrated here by Don Heyl, our design director, there's been quite a brouhaha this month over calls in Congress to add optional wind coverage for homeowners buying flood insurance from the federal government, but the White House pretty much sunk any hopes for the measure by testifying yesterday in no uncertain terms that President Bush will not support any such expansion. Given how screwed up the National Flood Insurance Program is--with its massive deficits--that's probably a good idea.
(For NU's coverage of yesterday's hearing, click here.)
Oh, sure, backers of the bill assure everyone that this time will be different--that actuarially-sound rates will be required--but who in their right minds could be anything but highly skeptical?
We can also be forgiven for doubting whether people will even buy the coverage they so desperately need even if the federal government makes it available. After all, look at how many people failed to buy flood insurance--even at subsidized rates.
“The administration supports leaving wind coverage to the well-developed private market for such insurance and not creating a federal program for wind losses,” Assistant Secretary for Economic Policy Phillip Swagel said in testimony before the House Financial Services Subcommittee on Housing and Community Opportunity.
Ah, well. That's that.
Although NU's Dave Postal reports that Democrats on the House Financial Services Committee might try to resurrect the concept by adding a windstorm coverage provision to H.R. 1862--a bill introduced earlier that would reform the NFIP and increase its borrowing authority--I think you can pretty much write off this initiative.
Such legislative maneuvering is standard operating procedure in the convoluted halls of Congress, but I doubt this gambit will succeed. Either the offending provision will be stripped out before the final vote, or it will kill flood insurance reform altogether for this session.
Rep. Gene Taylor, D-Miss.--sponsor of H.R. 920, the Multiple Peril Insurance Act of 2007--did not take the week's setbacks well. You may recall that Rep. Taylor has an axe to grind, finally settling his own suit against State Farm for Hurricane Katrina damages in January. He's been on a crusade to make the industry pay ever since.
As reported by NU's Matt Brady, Rep. Taylor, in his own testimony, said that his treatment proves insurers handled such claims poorly. “If they do that [deny a claim] to a congressman, what do you think they do to a school teacher, a football coach, or a retired petty officer?” he lamented.
Actually, in my view, the fact that insurers denied claims by such powerful people as Rep. Taylor and Sen. Trent Lott, R- Miss., proves exactly the opposite point--that no matter who you are, carriers will stand by policy language excluding flood-related losses, as well as wind damage concurrent to uncovered flood losses. (Whether the anti-concurrent-causation clause is fair, understandable and reasonable is an argument for tomorrow's blog).
What would Rep. Taylor have his insurer do? Pay the claim just to keep him happy, even if it means paying an uncovered loss, so that he won't be tempted to abuse his office by taking retaliatory steps--such as trying to overturn the industry's longstanding federal antitrust exemption? Wouldn't that be bribery?
The settlement might be an indication that the insurer made a mistake--or simply cannot afford the time, legal costs, potentially crushing damage award judgment and bad publicity that could result from a lengthly court battle.
Rep. Taylor also vented his spleen against insurance officials who testified to defend the industry's performance and warn about the potential pitfalls of an all-perils federal policy. “You have earned your pay,” he said of such witnesses, while resurrecting the bogus charge that the industry’s antitrust exemption allows insurance executives to “call each other up and say ‘let’s raise our rates.’”
That's just not true, but few members of Congress ever allow the truth to get in the way of a good lambasting of their political enemies--right or wrong.
Where do we go from here? There's no doubt there are major cracks in this system, but how do you fill those gaps without destroying the overall home insurance market?
Merely adding wind to the federal flood program is apparently a non-starter as long as President Bush rules the White House.
However, I can't help but wonder, is it time for insurers to write flood endorsements into their policies, if consumers want them to and are willing to pay for the added coverage? As long as actuarially-sound rates are permitted to be charged (a HUGE if, I know, given the inclination of states in cat-prone states to artificially suppress homeowners rates), what is the downside here?
What do you think?
Comments (7)
You mean sell an all-risk policy? To everyone, not just those at greatest risk?
Like car insurance or fire insurance, so that the risk pool is so broad that the program becomes a true insurance program, not a reinbursement program like heath insurance?
What kind of business model are you suggesting? Such a large premium pool might make money! That's not possible--ask the experts!
SAM RESPONDS:
Actually, I wasn't specific about it, but since you are forcing my hand, I would imagine the only way you could do this is if it was included automatically, and charged accordingly--if you live in a region very likely to flood, you pay the piper.
Otherwise, it would just be a nominal charge, or none at all, to reflect the lack of risk.
If flood was included in standard homeowners coverage, people couldn't simply opt out, as so many inexplicably do now by failing to buy federal flood insurance.
Posted by Joe Sanders | July 19, 2007 11:31 AM
Posted on July 19, 2007 11:31
The downside of flood endorsements at actuarially-sound rates is that floods don't happen every year.
When the flood does not happen, the carrier will have a big profit, pay 35 percent of it to the government in income taxes, and suffer policical pressure to reduce its "excessive rates."
Then in the year that the flood does happen, the money to pay for the catastrophe is gone.
For this idea to be viable, tax laws and reserving rules have to be changed to enable carriers to establish loss reserves for expected flood losses that haven't happened yet.
Posted by MH | July 19, 2007 11:52 AM
Posted on July 19, 2007 11:52
I agree that the the private-sector insurance companies should offer flood coverage under an endorsement. Why should the National FLOOD Insurance Program include "wind"?
Also, I believe it's time for the NFIP to dissolve the "Write Your Own" program and bring all flood policies back into the "direct" program, and have this administered by a qualified contractor under a competitive bid process. This worked quite well in the past.
If the private sector is unable or unwilling to accept the peril of flood in their policies--the NFIP would continue to service this peril. If the private sector is successful in writing the peril--eventually, the NFIP would become a "non-entity," and everyone who needs flood coverage would have it available from the private sector.
I do not believe that any WYO company would knowingly improperly shift the damages to the NFIP when they did not exist. However, that perception exists and, in this world, perception is everything.
Bottom line--if the NFIP continues, it should be operated as a "real" insurance company AND the private sector should take on the peril of flood (as some already have).
Posted by Bill Kennedy | July 19, 2007 1:06 PM
Posted on July 19, 2007 13:06
With respect to an "all perils" homeowners policy, the operative phrase is "actuarially sound."
Most individual insurance companies do not have the ability to integrate risk across their enterprise to gain a holistic view of company risk, let alone a holistic view of weather risk.
Only a centralized, super large risk aggregator like the federal government would have the ability to scale wind and water risk across a large enough threshold to establish "actuarilly sound" pricing for inclusion in an all-perils policy.
Under a "federal guarantee," insurance companies would make the all-perials policy mandatory. (Fire is not a frequent event either, but it is mandatory for a mortgage, so why not wind and water?)
If it were mandatory, it would be spread across a large enough base to make it economical on individual policies. "High-risk" areas would be charged an additional premium, but not an additional deductible.
This model spreads the risks and the profits across the spectrum of participating insurance companies, keeps premiums within reasonable pricing ranges, and encourages investment in real property.
That is what insurance is all about, is it not?
Posted by Edward Kalbaugh | July 19, 2007 1:24 PM
Posted on July 19, 2007 13:24
Automatically including flood coverage in a homeowners policy sounds temptingly simple, but would not encourage flood mitigation, as the NFIP does (however weakly).
More likely, by making coverage available, it would encourage more construction in high-risk areas.
Simply because someone wishes to build in a high-risk area does not give them a right to subsidized insurance -- of any kind. Those who choose to live in high-risk areas should pay their own way, and not expect others to subsidize them.
I live in California, and no one subsidizes my earthquake premiums.
Posted by Jeri Williams | July 19, 2007 1:43 PM
Posted on July 19, 2007 13:43
NFIP has never been required to pay for itself. The Taylor bill requires the new coverage to be risk-based. The Taylor bill avoids the flaws of the flood program and uses industry risk models to collect premiums for costs that the federal taxpayers are being stuck with anyway.
The Treasury witness did not even understand how NFIP works, and had no clue what he was reading. It probably had been written by AIA.
Multiple-peril coverage in NFIP will happen within the next two years unless the industry agrees to cover flood and wind in a single policy. That could only happen through some sort of public-private partnership.
Rep. Taylor has been asking for suggestions and proposals for all-perils coverage for a year-and-a-half, and so far no one has come up with anything else.
We wasted most of last year trying to figure out how to have all-perils private coverage with a federal reinsurance backstop. The Bob Litan/ Kevin McCarty/ ProtectingAmerica.org approach, except backing up all-perils coverage, not the current cherry-picking system.
Do we have to help the industry come up with an alternative? Okay, how about something like this?
Private all-perils natural disaster coverage with a federal reinsurance backstop that collects premiums from insurers and phases in at several catastrophe attachment points.
Perhaps a threshold where the feds pay 20 percent, a higher threshold after which the feds pay 50 percent, and a megacatastrophe level above which the feds pay 80 percent.
Never 100 percent federal--insurers would rip off the taxpayers for sure. The numbers could be tweaked, but if both have skin in the game, we could combine the efficiencies of the private market with the ability to set actuarially-sound rates with the government's ability to finance major catastrophes.
Posted by Brian Martin | July 22, 2007 2:10 PM
Posted on July 22, 2007 14:10
Since Rep. Taylor's home was completely destroyed by the wave surge of Katrina, it appears to be fairly obvious that his flood insurance limit was not sufficent to cover his total loss due to the limitation on high-value structures.
He apparently then attempted to collect the difference from the wind damage coverage in his homeowners policy, and the company resisted.
Many of us would differ with the company if that is true, but Rep. Taylor's problem is with the federal flood program and not with the insurance industry.
There would have been no problem had he purchased an adequate amount of flood insurance.
Posted by Bill Bryson | July 31, 2007 5:28 PM
Posted on July 31, 2007 17:28