How to Encourage Private Flood Insurance; Why Delaying Biggert-Waters Is Not the Answer

By Andrew G. Simpson | January 24, 2014
Flood

  • January 24, 2014 at 12:13 pm
    Squandered Youth says:
    Hot debate. What do you think?
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    The reason to stop Biggert-Waters NOW is that it addreses NONE of the serious, going forward issues raised in this article. Instead, it is a very narrow-focused, short-sighted and penny-wise, pound-foolish effort to pay off a part of a pre-existing federal deficit in a way that causes a ruinous impact on property values far in excess of the amount of money it seeks to raise.

    As an aside, B-W is also inequitable because it puts its entire burden on one stakeholder (homeowners)- who were unaware they were about to be blindsided – to the exclusion of other interested stakeholders (the federal government, banking and insurance industries, etc.) with equal or greater responsibility for causing the problem but who – unlike homeowners – had a seat at the table when B-W was put together in back-room deals. If B-W had been done with full disclosure of its ramifications to the affected public, the political storm that has broken now would have broken then and the statute would have never passed in its current form.

    Going forward, there are things that can be done to make a better flood insurance system. While the current subsidy system played only a minimal role in the NFIP deficit (overpaying administrative expenses and Katrina claims are the primary culprits – take out EITHER problem and the NFIP is solvent as-is), the subsidy system is inequitable and a better way should be found to soft-land all owners to actuarial rates. The flood insurance reform preceeding Biggert-Waters – eliminating grandfathering for repetitive and substantial loss properties, had the potential to weed out through attrition the worst risks responsible for a grossly disproportionate amount of claims, but was not given enough time to operate before B-W threw the real estate market into chaos by eliminating grandfathering for everyone. Getting a handle on administrative expenses (long identifed as a serious problem but not adressed by B-W) would also help. A start would be simplifying the Byzantine rating process that makes it impossible for consumers to determine what their premiums will be and how particular remediation efforts will affect them. If the government and insurance and banking industries are serious about reducing risk, remediation grants or no-interest loans should be much more readily available.

    There are things that can be done to bring all stakeholders together to set up a system that works. The one element that should be a non-starter, however, is private re-insurance. Requiring private re-insurance at a level sufficient to cover the simultaneous re-occurence of the San Francisco and North Ridge earthquakes was what rendered earthquake insurance in California utterly unaffordable. Requiring a flood insurnace to have on hand the funds to pay a Katrina and a Sandy every year would do the same thing. The federal Treasury is already the most powerful and least-expensive re-insurer imaginable. Private re-insurance would just make money for insurers at public expense. Given the public purpose of and huge public benefit provided by flood insurance (one of the foundation assumptions of the NFIP is that each dollar of premium a homeowner pays is a dollar less taxpayers have to spend on disaster recovery) using Treasury to spread the impact of rare but catastrophic high claims years is a legitimate, appropriate and cost-effective use of the power of the federal fisc.

    • January 31, 2014 at 1:07 pm
      Bill Price says:
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      NFIP paid Insurance Companies 30% to 66% commissions and Management fees (with no Risk), Congress took all the surpluses annually (built no reserves), and some un-insureds got rebuilt first, buy insurance after. So far we can’t find a comprehensive financial overview of the NFIP… just disjointed, incomplete information.
      Wonder why?
      Bill Price USLandAlliance.US

    • March 3, 2014 at 6:07 pm
      ssx1 says:
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      Unfortunately that foundational assumption failed, with $27 Billion coming from taxpayers via the Treasury on top of the many more billions in FEMA & state disaster aid. Treasury is certainly not the best reinsurer because Treasury 1. does not have the resources, ability nor authority to charge the NFIP a premium to build reserves in case of a loss, 2. even if they could, Treasury has no actuaries or even data to set premiums to reflect the risk of catastrophe, 3. in case you haven’t noticed, Treasury already has a $1 Trillion annual deficit and $16 Trillion in debt, so there would be no money for a Katrina or Sandy-level loss, forcing them to sell even more debt, raise taxes and/or cut spending elsewhere screwing up the country’s finances even worse, and 4. you’re placing the burden of insuring against floods on all taxpayers, most of whom do not live in flood prone regions our need flood insurance. At that point why have the NFIP at all and not just raise taxes across the board if its the taxpayers who are insuring the minority’s property anyways?

      The reason the rate increases were put on homeowners alone is because the NFIP had been relieving homeowners alone of the burden of risk based rates for 50 years, which is a primary reason why the program is in such terrible financial condition, and without charging risk based rates people will keep building & buying homes in high risk areas with little incentive to pay for risk mitigation & elimination, i.e. elevating homes, better levies, retaining walls, etc. Part of the idea of the reform was to intentionally depress real estate markets in very high risk areas so that only those willing to assume the true risk & costs of living in flood-prone areas would live there, lowering overall risk, losses and societal costs. For example, there were people who lived on Long Island with only a seawall between their house and the Atlantic who underestimated the huge risk and costs of a flood that they didn’t bother to build a levy or even buy subsidized flood insurance because there were no incentives to do so, and seemed truly shocked when they lost their homes because they’d never thought it would flood there. This unpreparedness cost tons of money, but with risk based premiums there would have been an incentive for risk prevention, a disincentive to build up high risk areas, and a clear understanding that the risk of flooding is high.

      Private insurance companies are required to have sufficient reserves and reinsurance to cover enormous cat losses, so how are they able to survive but government insurance programs would collapse under the same requirement? Private insurers paid out billions after Katrina & Sandy without going billions into debt or having their reinsurance costs cause a death spiral, but requiring the government insurance monopolies to follow the same rules is a horrible idea that would kill the NFIP? Either private reinsurers with acturarial expertise and without political restraints make money at “the public’s expense”, or the NFIP/Treasury does as they blow through another $27 billion of taxpayer’s money-at least the reinsurers would provide actuarial services, dependable reinsurance not coming from taxpayers, and cost much less than $27 billion especially with reimbursements for cat losses.

      B-W was not ideal and was very poorly executed by the government as usual, but what you propose is far worse and sounds more like an angry homeowner trying to save the value in their property.

  • January 24, 2014 at 3:35 pm
    Dave says:
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    Seems to make sense. Market based rates and removal of subsidies so that the true costs of owning homes in flood prone areas will provide the proper incentives/disincentives needed. If the rates inflicted by Biggert-Watters are truly punitive and not fair, then private insurers will step in at reduced premiums because of the profit motive. If the rates are fair or under-stated, the private insuers will stay away, vindicating the rates charged by the legislation. The sooner the governemnt gets out if this, the better.

  • January 24, 2014 at 3:36 pm
    Middle Class Coastal American says:
    Well-loved. Like or Dislike:
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    I completely agree with your post. This isn’t a matter of other taxpayers subsidizing rates on many of these homes. Many of these homes, that now face substantial increases (from $600 to $25,000+) are homes that were built according to GOVERNMENT REQUIRED STANDARDS at the time and have never had flood claims or have had minimal flood claims. Yet now the government comes in and wants to say the guidelines they established and were followed by homeowners are no longer valid and remove the “grandfathering” on these homeowners who have followed all of the rules. In other words, too bad homeowners, you’re left holding the bag according to the government. You’re correct, not only are unreasonable administrative costs to blame for much of the shortfall but also FEMA’s own decision to provide “grants” to homeowners whose homes have flooded but had no flood insurance has had an impact on the deficit. I’ve seen that happen in my own city following Ike. It’s time for FEMA to take responsibility for their failure to properly administer this program and the administrative costs involved in it.

    In addition, I am tired of our government handing out billions of our tax payer dollars to help other countries for every reason possible but in this case with the Biggert Waters Act, they have no concern to help the millions of Americans who are drastically effected by this legislation due to no fault of their own and live in the effected areas. Many of those areas face additional changes and increases in premiums due to newly released, faulty maps from FEMA. It’s time the government holds FEMA responsible instead of the many homeowners who have paid more than enough premiums to cover all of the claim payouts that have been made by FEMA.

    • March 3, 2014 at 6:15 pm
      ssx1 says:
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      Million* Americans, not millions. Only 1.1 million receive any subsidy at all, and many will see only mild increases in rates. Florida just has 25% of that million, about 250-275,000 properties losing subsidies. In a country of 350 million people and well over 150 million households thats a small number for such a huge issue.

  • January 24, 2014 at 3:46 pm
    jw says:
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    NFIP was created to protect the Banks collateral so they could develop and lend in high risk areas. Most purchase flood to protect the bank loan. Before NFIP coastal homes were of modest construction and could be cheaply replaced. Now we have huge residences and big debt.

    • January 27, 2014 at 9:42 am
      BWM says:
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      NFIP was created to induce property owners to purchase flood insurance pre-loss rather than to look for government aid post-loss. The involvement of banks came mainly because it was a way the government could enforce the requirement: link the purchase of flood insurance to the underwriting of a mortgage. The government placed the obligation on the banks, not the other way around.

      • March 3, 2014 at 10:49 pm
        jw says:
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        BWM….The Banks lobbied and funded politicians to create NFIP so they could lend in these flood prone areas. Congress was only too willing to oblige.

        • July 2, 2014 at 2:05 am
          JMJ says:
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          It is always about the banks. I bought my home in 1994 twenty years ago and paid 400 dollars a year for flood insurance noe 3200 a year and never has a claim been made to collect anything for any damage ! None has occured in all the years I have lived her eand yes it survived the 38 and 54 hurricanes. It is in the bay not on the ocean!! Wish I could pay it off so I wouldn’t need the flood insurance . And NO I would not go to the government for help if it was destroyed by flood at that point I would move !!

  • January 24, 2014 at 5:26 pm
    Baxtor says:
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    Or the Federal government could stop for one year, paying big oil their subsidy and put those billions into the past flood program’s debt.

    • March 3, 2014 at 6:24 pm
      spartyon33 says:
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      That doesn’t solve the long term financial problem caused by inadequate rates building insufficient reserves to pay all losses in full when the next big flood hits. Do you want to tell the family that doesn’t receive payment for their claim that you helped fight the risk based rates that would have made the NFIP financially sound because you didn’t want you’re rates going up, even though the 4.4 million policyholders without subsidies paid more to subsidize your policy for decades?

      See, I can do it too!

  • January 25, 2014 at 8:10 am
    inflorida says:
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    Most of these homes are not big homes, but small homes.

    Rate increases on 130k home have gone from $1,200 to over $8,000 without explanation. So yes these rate increases are not actuarial, but punitive.

    However, the idea that punitive rates will motivate private insurance lenders to enter the market is flawed.

    Since the government remains in the market and is mandating these higher rates, it is much easier for private insurance to charge the same or similar rates. Private insurance can simply say “See FEMA has this rate too and so we are just going by government guidelines.”

    It will be price gouging all around, with little or no explanation, and people will lose their homes.

    In no way does Biggert-Waters create, balance, or reflect a free market or actuarial rate. It is an administrative agency money grab.

    • March 9, 2014 at 7:02 pm
      ssx1 says:
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      Are you an actuary and have analyzed the flood loss frequency, severity,and trends, administrative costs, loss adjustment expenses, and distribution costs by state, region, zip code, elevation, and flood zone? If not, how do you know with such certainty that the rates aren’t actuarial and are instead punitive? Just because rates seem high does not automatically make them punitive, especially since the rates had been heavily subsidized for decades. Homeowners insurance rates in Florida and coastal areas are also very high and many carriers have pulled out of the market in coastal regions because the risk of widespread catastrophe losses are so high that charging actuarially sound rates isn’t possible because of either market forces or government regulation.

      If private flood insurance companies do enter the market and you’re right that NFIP rates are punitive, then private carriers would certainly charge much less. Private companies have a strong incentive to charge competitive rates, which will allow them to sell a sufficient amount of policies to adequately spread their risk geographically, build sufficient loss reserves, and turn a profit in a very high risk business. If they charged rates similar to the NFIP it would be difficult or impossible to write enough business to justify entry into the market and stay afloat, and even if say the first 4 carriers do overcharge a 5th carrier will certainly enter the market and charge actuarial rates, undercutting the other carriers and forcing them to lower rates to survive.

      Your theory is clearly wrong. The idea is that charging actuarial rates will allow private carriers to enter the market with the ability to compete with the NFIP, because private carriers can’t subsidize rates like the gov’t can. Introducing competition between private carriers with actuarial expertise, an incentive to incentivise loss prevention and mitigation by policy holders & communities, and the ability to keep flood maps updated will keep rates consistently accurate and lower than the government can. Keeping rates subsidized only transfers risk from flood policyholders and at risk homeowners to taxpayers at large who have not chosen to accept flood risk. Rate increases should be postponed until accurate flood maps can be created, but charging actuarial rates is necessary to ensure the future of the NFIP and its ability to pay claims for policyholders who suffer a loss.

  • January 25, 2014 at 11:05 am
    Evan says:
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    Philadelphia Insurance is already offering a second option to the NFIP. Higher limits, no flood cert needed.

    Keep in mind this is separate then the NFIP. Philadelphia also offers NFIP.

    • January 29, 2014 at 8:49 am
      Floodnerd says:
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      For Commercial accounts… if youre in B,C,X…AE considered subj to underwriter approval – unacceptible exposures – coastal locations(properties subj to tidal surge in a CAT 3 or less, high valued risks with tiv in excess of $15M, risks with prior flood losses, any V flood zone, residential condo’s.

      Excellent service too!

  • January 25, 2014 at 2:24 pm
    mm says:
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    the government could bail out AIG and the other banksters to the tune of 700 billion as well as the wasted billions of $$$ in corporate subsidies, but when it comes to helping the average american homeowner keep a home that they purchased when they were in low risk or no flood zones, Sorry!
    This bill is going to devastate home values and bring many a town and county to its knees, all they accomplished is shift the burden from the federal govt. to local. We need a national catostrophic plan.

    • January 29, 2014 at 9:08 am
      Dave says:
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      If it keeps people from building homes where they shouldn’t, I’m all for it. Justifying this because of the ill-advised bailout of AIG and other financial institutions should not have been done either.

    • March 9, 2014 at 7:15 pm
      ssx1 says:
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      No, it shifted the burden from the taxpayers to homeowners who have chosen to live in flood-prone areas. The financial bailouts were loans, not subsidies, that were paid back at a profit to the government. Fannie & Freddy may not have paid them back, I’m not sure, but they are GSEs taken over by the government who now owns their stock and are entitled to their profits. It’s an entirely different situation.

      The federal government, other policyholders and taxpayers have been “bailing out” these high risk homeowners for 40+ years by heavily subsidizing their rates to the tune of at least $27 billion in current debt plus whatever reserves should have been built had they paid actuarial rates. If charging adequate premiums lowers losses and discourages people from building & living in high risk flood zones, then so be it. People are free to buy & build in these areas, but they should accept the risk they’re taking by doing so. The NFIP can’t keep building up debt; sooner or later there won’t be money to pay claims leaving all policyholders SOL.

  • January 28, 2014 at 9:45 am
    Bill Price says:
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    Has anyone seen a comprehensive financial analysis of the NFIP?
    Bill Price



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