Flood Insurance

Recent events in Wisconsin — specifically, the flooding and draining of Lake Delton — provide a harsh reminder that the NFIP is about more than just providing flood insurance.  For NFIP coverage to be available in a community, that community is required to abide by federal policies intended to reduce the potential devastation from flooding.

Lake Delton, Wisconsin wasn’t signed up with the NFIP.

Seen at the Milwaukee Journal-Sentinel:

Residents and landowners affected by the Lake Delton breach spent Wednesday seeking an explanation for why the community opted out of a free national floodplain insurance program that 90% of the state’s flood-prone communities have joined.[...]

The Village of Lake Delton began the paperwork just two weeks ago to rejoin the floodplain insurance program after a dispute with FEMA’s floodplain elevation maps from 2001 caused it to back out. But because of that decision, residents such as Tim Fromm, Tom Pekar and Don Kubenik were not able to obtain flood insurance - which is backed by the federal government - for the homes they built on the shore of Lake Delton within the last few years.[...]

Oopsie.  The lawsuits arising from this should be…entertaining

Seen on the wires:

The U.S. Senate voted on Tuesday to extend until 2013 a federal program that insures millions of homes against floods and to forgive $17 billion in debt the program built up during Hurricane Katrina.

In an issue of concern to major insurers such as Allstate Corp and State Farm, the Senate approved renewing the National Flood Insurance Program (NFIP) in a 92-6 vote. Last week, it rejected adding wind damage coverage to the program.

The House of Representatives last year also voted to extend the program, but added wind coverage, and refused to forgive the debt.

Now, the big question is — with a general election this fall, will anything actually happen on NFIP reauthorization?   Or, maybe another way to think of this is: who can get the most votes for getting reauthorization done…and what sort of a mess will be made in the quest to buy voters’ support?

One of the central themes when it comes to discussing the high cost of property insurance in catastrophe-prone locations is that of whether people who live in harm’s way should bear the financial burden of the risk they face…or is covering such risk seen as a social need sufficient to justify subsidies paid by folks in safer locations, either through insurance rate-setting, or via a government construct.

Interestingly, it seems that a coalition of consumer and environmental entities are questioning the wisdom of enabling folks to live in environmentally sensitive areas…which tend to be highly correlated with “riskiest to insure.” 

Seen in Insurance Journal:

An unusual alliance of insurance and environmental groups is urging lawmakers to focus on policies that encourage property mitigation and environmental protection in catastrophe-prone areas, rather than expanding the government’s flood insurance or “bailing out” Florida’s catastrophe plan. [...]

Americans for Smart Natural Catastrophe Policy said it “strongly opposes proposals that encourage people to build homes in hurricane-prone, environmentally-sensitive areas by creating new programs to directly or indirectly subsidize their homeowner’s insurance.” The group cited proposal to make wind coverage available in the federal flood insurance program as the type of public policy it opposes.

San Friedman has a nice summary of simmering political circus surrounding proposals to add wind protection to the NFIP—a circus which bizarrely sees Bob Hunter allied with the insurance industry for a change.

I’ll suggest interested readers check out Friedman’s article if they desire to be brought up to speed.

However, there is one interesting bit of thought that has triggered a line of rambling in my mind.

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?”

Maybe I’m’ misremembering, but I thought that part of the justification for the NFIP was that it could be a vehicle to head off future flood disasters. In return for the feds making flood cover available, local communities would be obliged to take measures to head off future flood losses, by zoning, flood control programs…essentially measures that would eventually lead to fewer properties being in harm’s way, and therefore would require less federal financial support to aid in post-disaster recovery.

If the “prevention of future loss” element of the NFIP were actually effective, I wonder if the program’s expansion into other perils would necessarily be a bad thing. Yes, I prefer free-market solutions, but having state intervention to discourage future irresponsible development in storm-prone areas isn’t necessarily objectionable to me. If government-provided cat insurance is the carrot necessary to make the stick effective…I wouldn’t necessarily hate that.

Of course, the catch to such thinking is that the NFIP hasn’t been as effective in getting folks out of harm’s way as perhaps is needed. Unless that lack of efficacy is addressed, expansion would seem to be a bad, if not idiotic, idea.

Seen in the Clarion-Ledger:

Gulf Coast senators have joined to block reauthorization of the federal flood insurance program in an effort to add wind coverage to the legislation.

Mississippi’s Republican Sens. Thad Cochran and Roger Wicker have agreed with Sens. David Vitter, R-La., and Mary Landrieu, D-La., to use a Senate procedure known as “hold” on the legislation, blocking a Senate vote, to win assurances they could amend the bill.[...]

Wicker said the federal government must offer wind coverage because “since Katrina, it is … common practice for insurance companies to not offer wind insurance at a rate that is even close to affordable.”[...]

“The private insurance market is more than capable of handling wind coverage,” said National Association of Mutual Insurance Companies lobbyist Jimi Grande. “Adding an additional peril to the NFIP (National Flood Insurance Policy) would only drive the program further into debt.”

Although it’s conceivable that government could provide cat wind cover more efficiently, and therefore somewhat more cheaply than the private market, I think Wicker underestimates what the cost of federal coverage would be, especially if the program seeks to be mostly fiscally independent of the rest of the federal government.

If affordability is a concern, well, I’m sure that folks in Wisconsin, Iowa, and North Dakota won’t mind subsidizing the wind risk faced by coastal residents.

Of course, with this being a Presidential election year, and with an electoral-vote-heavy battleground state being chock full of coastal residents….wacky lapses of good sense are definitely possible.

Seen in Insurance Journal:

Under legislation signed this week by Gov. Eliot Spitzer, Empire State homeowners will get an annually mailed reminder of this fact, as well as information on how to obtain flood coverage from the National Flood Insurance Program.[...]

“An annual notice will give our members’ clients a repeated opportunity to consider the risks posed to their property by flooding,” said Martin Koles, president of the Professional Insurance Agents of New York State, which supported the bill. The single flood insurance notice customers currently get “can be overlooked easily among all the documents they get when purchasing a new policy,” Koles said.

Like there aren’t already a lot of documents that most consumers tend to ignore at renewal, especially if their premiums are paid through a mortgage escrow account?

It’s about time. From Reuters:

U.S. Sen. Christopher Dodd said on Wednesday he is determined to move federal flood insurance legislation through the Senate promptly, despite resistance from Louisiana lawmakers.

“I intend to do all I can to move this legislation to the president’s desk as soon as possible,” said the Connecticut Democrat, a former presidential candidate who outlined his 2008 priorities at a press conference.

Dodd chairs the Senate Banking Committee, which in October voted unanimously to reform federal flood insurance while refusing to follow the lead of a House of Representatives bill that would expand the program to cover wind damage.

I would be remiss if I didn’t point out that the New York Times has an article today discussing changes in homeowners insurance over the past decade:

The insurers say they have had to take defensive measures to stay in business and pay claims as operating costs have climbed. “If you’re being overly generous in covering risks and you’re not taking in sufficient premium, it doesn’t make business sense,” said Richard Ward, the chief executive of Lloyd’s of London, a large insurer of homes and businesses in the United States.

Yet some industry experts and consumer advocates say that efforts by the insurers to increase profits, after years of taking losses on home insurance, are shifting more of the burden of repairs and reconstruction to homeowners. The cutbacks in coverage, consumer advocates say, have contributed to the slow recovery of the Gulf Coast from Hurricane Katrina and will most likely hamper recovery from the recent wildfires in California.

The article isn’t quite as pro-consumer-biased as some I’ve seen. While the article does mention how homeowners was a loss-leader product in the 90’s, and recent changes have been made to address that, I would have been happier to see some reference to how homeowners profitability compares to other industries with similar volatility, and some mention of just how bad some of the mega-catastrophes that keep cat management folks up at night could be, unlikely though they may be.

Similarly, I also think the author of the article could have included what should be an obligatory exhortation to readers to double-check the limits on their homeowners policies (and/or to look into “inflation guard” automatic-coverage-A-increase features), as well as a reference to one of the holes in the National Flood Insurance Program—the relatively small maximum limits permitted.

However, all-in-all, it’s an interesting article to read on an otherwise slow news day, particularly if one is hiding from the Black Friday crowds.

Seen in Insurance Journal:

A system of flood gates and pumps built since Hurricane Katrina to help alleviate flooding in several New Orleans neighborhoods may not be as much help as authorities first said.[...]

The maps showed that the improvements made to the city canals’ drainage systems would reduce flooding during a major storm by about 5.5 feet in Lakeview and nearby neighborhoods. The maps were based on a storm that has the likelihood of occurring at least once in 100 years.

But in a report released Nov. 7, Corps scientists estimated that the actual benefit the system would provide would be just 6 inches.

The discrepancy was tucked into the voluminous report’s appendices, and neither the Corps nor the scientists hired to conduct the study brought the changes to the public’s attention when the report was released. It wasn’t until New Orleans television station WWL-TV asked an engineer involved in the assessment about the discrepancy that it became known.

There are, of course, three major lessons to be learned:

1. Always check your math.
2. There’s a significant difference between addition and subtraction (the discrepancy was driven by a “minus” being placed where a “plus” should have been
3. When people’s lives and life savings’ are at stake, it’s probably a pretty good idea for the government agency doing major work to release technical data and permit independent review.

The Senate Banking Committee has been busy. In addition to working through a less-likely-to-be-vetoed TRIA reauthorization measure, they’ve put together a much saner-sounding NFIP reform bill. Insurance Journal has a summary of the differences between the House and Senate measures:

The Senate version also differs from the House bill in that it does not include optional federal wind coverage, something insurers have said would result in a dramatic expansion of the NFIP – with the potential for huge deficits – and a fundamental realignment of both the NFIP and the private wind insurance market.

The Senate bill won praise from insurers, while agents expressed disappointment that it lacks the increased limits and the business interruption and living expense upgrades.

Currently, the NFIP has an upper limit of coverage of $250,000 on the dwelling and $100,000 on contents on residential properties. The House proposed bumping those amounts up to $335,000 and $135,000.

I think that I would have to agree with the agents on this one. To the extent that the NFIP needs reform, I think some harmonization with the industry standard terms on homeowners insurance, including coverage limits reflecting recent developments in the real estate market, is in order.

What’s not clear to me at the moment is where things stand on the issue of “grandfathering”—the idea that if your property is insured through the NFIP, and the FEMA flood maps are subsequently redrawn to place you in a higher risk zone, you’re protected from the rate hike that would be expected to emerge as a result of the new risk profile.

Such a hike would be actuarially appropriate…but the NFIP has a social element to it too, including getting folks to participate in the risk, seek protection, and incentivize them to protect themselves from flood (as opposed to simply accepting government handouts to rebuild post flood).

If you’re going to shock a homeowners NFIP rates just because the government draws a new line on the map…well, that would seem to disincent folks from maintaining the behaviors that you’re trying to get them to adopt and maintain.