They say politics makes for strange bedfellows, but I thought April Fools Day had come early when a news release hit my e-mail this morning announcing that the Reinsurance Association of America was on the same side as the industry's chief critic, Bob Hunter of the Consumer Federation of America, in opposing expansion of the National Flood Insurance Program to include wind damage.
As reported by our own Matt Brady, Mr. Hunter, CFA's insurance director, has indeed joined a consortium that includes RAA--along with various tax and environmental advocacy groups--to discourage the Senate from adding wind coverage as part of the Flood Insurance Reform and Modernization Act of 2007.
(For the complete story, click here.)
The House has already passed a bill including a provision to add a wind coverage option to NFIP's menu, sponsored by Rep. Gene Taylor, D-Miss.--who had to sue State Farm to get his own Hurricane Katrina claim settled following a dispute over wind versus flood damage.
This is a bad idea--not in theory, because in the real world it makes sense for a homeowner to be able to protect themselves against all hazards in one insurance policy--but in practice, because the NFIP has been such an utter disaster! The program was shamefully underfunded, in large part because its premiums are never actuarially sound.
The fact that even Bob Hunter agrees with the industry's position--a move he admits warrants a headline of “man bites dog”--proves beyond any reasonable doubt that this would be a counterproductive move.
Mr. Hunter has been no ally of the industry in wind-versus-water disputes, but his major objection to NFIP's proposed expansion echoes that of the industry--that essentially dumping subsidized wind coverage into the insurance market would do more harm than good in the long run by encouraging more construction in catastrophe-prone areas.
Of course, the bill's sponsors assure us that rates would in fact accurately reflect risk, but their credibility is sadly lacking since the NFIP has never been on a sound basis from a rating perspective. With a public facility like NFIP, the political pressure is simply too great to appease voters by underpricing insurance coverage. That would make it easier to build in coastal areas--which is the last thing we should be doing.
If this expansion is approved, it not only would increase exposure, but would add another shaky floor to a federal program that already has a rickety financial foundation.
Mr. Hunter shrugged off the significance of his odd and temporary alliance with the industry he loves to harass. “I don’t usually align myself with them unless it’s something I feel is important," he told Mr. Brady. "The insurance industry is strong enough. They don’t need me.”
However, I think it would be a mistake to underestimate the importance of having someone with the credibility of Mr. Hunter on the industry's side in making the case against adding wind coverage, given his decades-long dedication to protecting consumer interests. Indeed, his backing of the consortium could prove to be the tipping point against the proposal.
Debate over the controversy will come to a head this summer, since Congress must reauthorize the NFIP before it expires on Sept. 30.
The battle to keep wind out of NFIP won't be easy. Powerhouse Sen. Hillary Clinton, the New Yorker looking to win the Democratic nomination for the White House, is solidly behind the bill--in fact, she introduced the Senate's version of the legislation passed by the House, and is lobbying Sen. Chris Dodd, who chairs the Senate Banking Committee, to support addition of wind coverage.
That's going to be an uphill battle, as Sen. Dodd--the Connecticut Democrat known for his support of the Hartford-based insurance community--has already sent different legislation to the floor that does not include coverage for wind risks. (Click here for that side of the story.)
Action has stalled because the Senate bill--sans wind coverage--is being held up, reports our own Dave Postal, due to "objections by Louisiana’s senators, who have expressed concern that the provision for a change to actuarial rates would make the program unaffordable to many Louisiana residents." And you thought the cost of flood insurance couldn't be politicized!
Sen. Clinton has good reason to add wind coverage to the NFIP, given the increasingly hard time facing her constituents on Long Island when trying to get affordable homeowners coverage, with many private carriers pulling back and hiking rates in fear of a monster hurricane storming up the East Coast sooner rather than later. As a Brooklynite living a mile or so from the ocean, I can even sympathize.
But I doubt the NFIP is the solution rather than a big part of the problem. An editorial in today's "Roanoke Times" summed it up best:
"Everything bad about the National Flood Insurance Program--it encourages development in flood-prone areas, pays homeowners to repeatedly rebuild where they should not, and forces inland taxpayers to assume risk taken by often wealthy homeowners who choose to live near or on the coast--would be magnified by a proposal to have the program cover wind damage."
The editorial adds pointedly: "This is a rare time when corporate interests and public interests coincide...[W]hy should the federal government go where private insurers fear to tread?"
Its conclusion was even more devastating to supporters of coverage expansion. "If anything, the federal government should be moving out of the flood insurance business, not expanding into hurricane coverage." (For the complete editorial, click here.)
RAA President Franklin Nutter was right on when he observed that the “diversity of the consortium’s membership demonstrates that NFIP is much more than an insurance issue.”
It's hard to imagine Congress rejecting the common sense case made by such a wide-ranging coalition representing both insurance providers and consumers. But Congress has been known to take steps that have nothing to do with common sense, especially in an election year.
Of course, even if Congress somehow agrees to add wind coverage, I have no doubt President George W. Bush would veto any such move. With expiration looming on Sept. 30, the NFIP thus could become this year's version of TRIA, complete with 11th hour political brinksmanship at the height of the presidential campaign season.
My guess is that proponents will have to postpone their fight to expand NFIP for another day, or risk seeing the program lapse entirely, leaving millions at risk.
What do you folks think?
Comments (5)
Sam, I agree with your analysis on this issue, except for one conclusion about coastal development.
People live near the coast because many have an affinity for the water and the amenities it offers, not because there is a National Flood Insurance Program, which became a reality in 1968.
Blaming the NFIP for high density in coastal areas is misguided and obsures the other problems the flood program has to contend with.
The program was financially solvent for many years until climate changes and other factors caused more hurricane activity, which put a strain on its ability to pay claims.
Another important factor is the continuing politicizing of the rules and procedures it must enforce to mitigate flood damage.
The building codes it requires in the floodplain must be adopted and enforced by the participating communities, so inspection and oversight are crucial to the program's
success. Funding is required to recruit and train people who make community visits to see that community enforcement is strictly observed.
Without this component of the program working properly, the flood program--which is not a true insurance program because it insures mostly high-risk property--the NFIP will continue to be a drain on the national treasury.
Adding wind to the NFIP at this point is creating a scenario that will be disasterous to its viability.
Posted by Steve Daroff | March 28, 2008 1:16 PM
Posted on March 28, 2008 13:16
I don't follow the logic in equating a program established in 1968 that was intended to be a federal subsidy in the NFIP to one on the drawing board that requires actuarially sound premiums in HR 3121.
Also, as Mr. Daroff pointed out, NFIP paid for itself until 2005. And there is a boatload of evidence that indicates insurers may have charged the taxpayers for their wind coverage obligations detailed in news stories such as the Enterprise award winning one by Rebecca Mowbray titled Same house. Same repairs. Same insurer. Why different prices?. One lawsuit extrapolated that as much as half of the NFIP deficit could be the result from such practices.
The accompanying news story in the National Underwriter failed to mention that both of Mississippi's Senators have joined Senators Landrieu and Vitter in blocking the S. 2284. Also Senator Vitter did not cite cost as his problem with S 2284 in his letter to Chairman Dodd. Rather, he cited the need for increased limits, adding business interruption and the need to add a wind component as his reason. Senator Vitter's letter can be found here.
The best way to prevent development in flood prone areas is to make the flood insurance reflect the risk at a given elevation. Additionally, we should discontinue the use of federal funding for water and sewer projects in low-lying areas. It makes no sense whatsoever to run infrastructure without providing a mechanism for residents to insure their property. It's a classic case of the right hand not knowing with the left is doing at the federal level.
In my opinion, the answer is not found by providing flood coverage where the premiums are figured via means testing or withholding viable wind coverage for coastal residents. While I agree with Mr. Hunter that the long-term solution lies in controlling the type of development we allow on our coastlines, I do not agree we should abandon them in total.
At the very least Klein-Maloney should be strongly considered--after all, if a federal backstop is good enough for private insurers in the area of terrorism, it should be good enough for the state wind insurers of last resort.
Mr. Friedman, as your post implies, we have come a very long way from the mindset last year that Rep. Taylor's bill had no chance at all. Coastal residents may very well have to wait until the next President is sworn into office to get some relief though.
Posted by Sop81_1 | March 30, 2008 7:07 AM
Posted on March 30, 2008 07:07
The main part of the HR 3121 verbiage about multi-peril coverage that is an "out" for supporters of it is the section "Requirement to Cease Offering Coverage if Borrowing to Pay Claims."
The nutshell version of that part says that if the program has to borrow funds to pay the multi-peril claims, no new policy may be written and no existing policy may be renewed until the full amount borrowed (plus interest) is paid in full.
Doesn't NFIP STILL owe the Treasury for funds borrowed following Katrina/Rita? That's about 2.5 years, right?
If HR 3121 had been in place then, anyone that would have had multi-peril coverage would have been paid (normal exclusions apply), but no one would have had their policy renewed and anyone desiring multi-peril coverage after that would still be waiting...for NFIP to pay the funds back (with interest, of course).
Do they try to wait it out or do they get force-placed coverage or, or, or, or...?
SAM RESPONDS:
Thanks for the head's up about this provision, about which I had not heard. I will have our D.C. office double-check this, but I believe that the reauthorization bills being debated in Congress would forgive the debt NFIP ran up during the monster hurricane seasons.
Posted by Chris M. | March 31, 2008 9:45 AM
Posted on March 31, 2008 09:45
Mr Friedman, my understanding is that HR 3121 requires the existing NFIP deficit to be repaid, while S. 2284 forgives the deficit. I have texts of both bills as well as the current law here for those interested.
I was also able to get some clarification from Rep. Taylor's office on the provision in HR 3121 that Chris M cited in his post.
It was added as an amendment in the House Financial Services Committee. It illustrates how poorly many members of Congress understand insurance issues, even in the more wind-friendly territory of the House of Representatives.
It does not apply to the flood program's debt, only to the multiple-peril option's balance sheet.
The provision appears unnecessary because the federal program should easily be able to set premiums based on expected losses and keep them there.
If there is a massive hurricane early in the program, then the program would need to borrow but would be able to repay the debt easily over time. This provision is a good example of why there are technical corrections bills passing Congress with regularity.
Posted by Sop81_1 | March 31, 2008 8:04 PM
Posted on March 31, 2008 20:04
Sam, every point you made in your recent article, “Keep Your Heads Above Water,” makes good economic and political sense.
But, I would ask: Who gets to live in New Orleans (or other coastal communities)?
I understand the technical argument of risk-based pricing and the philosophical argument that suggests that the nation shouldn’t subsidize risky behavior.
Let us leave aside the concept of second homes, mansions on the beach, and hotels with a 20-story ocean view. Let’s initially limit this discussion to the more practical matter of who gets to live in New Orleans.
Just the stevedores? Perhaps the tugboat captains? Of course, the deckhands on the tugs will be needed. After the tugboats push the barge alongside the dock, and the stevedores unload the barges, the cargo needs to be transported by truck to a railyard. So, we’ll probably need truck drivers.
The trucks will likely need maintenance, so mechanics will be necessary.
Someone needs to feed all these people, or at least sell them food.
If one of the butchers cuts his hand, he’ll need a doctor and a nurse.
When he gets to the emergency room, someone will have to take his medical information to get the claim processed. If the accident was serious, he may need to be transported in an ambulance driven, of course, by a driver and staffed by a paramedic.
This extrapolation could go on and on until you have a million people serving one of the nation’s largest ports. Most of them (or their ancestors) lived here long before NFIP encouraged their risky behavior.
Who depends on that port? We can play the same game all over again with the farmers in the Midwest who export grain all over the world. New Orleans is the nation’s largest port for steel imports used in all areas of the nation’s manufacturing economy. If the stevedores can’t move it in New Orleans, the price of steel goes up (steel doesn’t come through New Orleans because the ship captain likes the music here), increasing the cost to our marginally competitive manufacturers.
What would happen to the inland economies and the economy of the nation if the port of New Orleans were no longer open for business because risk-based insurance pricing had closed it? Would the farm-implement dealer sell less equipment? Would the equipment manufacturers then have to lay off workers?
New Orleans isn’t the only port with these issues. Gulfport, Mobile, Miami, Jacksonville, Savannah, Charleston, Norfolk, Houston, and so on, all serve the country and lie in nature’s path. That’s the nature of a port. Deep-draft, ocean-going vessels can’t go very far inland, so the ports must be near the sea. The weather is part of the package.
So, when people from the inland states suggest that people along the coast should pay ten times higher insurance rates, the inlander should be asked: What’s it worth to you? Which jobs in the heartland of the country should be sacrificed on the principle of risk-based pricing?
Who gets to live in New Orleans, or any coastal city? This is a larger economic question that deserves a more thoughtful response than the knee-jerk retort of risk-based pricing.
In the meantime, while we in New Orleans are stuck with that answer from the market, the recovery of our area is stuck with the reality of homeowners premiums increasing threefold (without flood, of course, and often without wind), if coverage is available at all and commercial property rates doing the same.
When the city collapses under the weight of risk-based pricing, and the cost of steel increases, and the cost of handling grain exports increases, the government will then come up with a number of tax incentives, subsidies, etc. that will shift the costs to the rest of the country. Is it truly better late than never?
You’re right, adding wind to NFIP is a lousy idea, politically and actuarially. Until the private markets provide a solution, I guess it’ll be just the stevedores and I who get to live here.
Anderson Baker
Posted by Anderson Baker | April 2, 2008 4:02 PM
Posted on April 2, 2008 16:02