I wanted to write something this week about some piece of policy minutia. I had about 500 words written when I realized that it wasn’t going to happen. So, I set that aside and gave in to what was really on my mind. Water.
Where I live in Florida has had a lot of rain this year. About two weeks ago, my wife and I were on our way home when we stopped in at our church. What greeted us was water getting into the building. We spent a few hours cleaning up the mess and making sure that no more was getting in. Of course, it was within the next few days that Congress punted on the question of the National Flood Insurance Program (NFIP).
Here we go again. How many times are we going to ask this august body to decide on an insurance program when their primary interest appears to be their own constituency? Before we get too political, let’s focus on the actual issue: NFIP. There are a few provisions that need to be a part of a long term NFIP renewal.
A real renewal
Let’s quit messing around with it. The NFIP needs a significant renewal with an actual expiration date. Rather than playing around with it, like a proverbial political football, give it a real renewal. This is an issue that should not be punted along so that someone else can deal with it. Give the NFIP one more (and only one) ten-year extension.
Why ten years? Ten years is long enough to force the voluntary market to take up this exposure and build a healthy and competitive market. If the voluntary market won’t address the exposure, force our hand. I contend that there is enough data to make the financing of the risk of loss both profitable for insurance carriers and affordable for the consumer. The renewal should be constructed with two major mandates.
First, mandate that the states work with their admitted carriers (and larger surplus lines carriers) to include the peril of flood in the admitted property policies, both commercial and personal. Adding flood as a covered peril reduces the cost per policy. Think about it. The homeowners’ policy and the commercial property policy are both rated so that they include the administrative costs related to it and the other related policies. A separate flood policy has its own administrative expenses. If it’s rolled into another policy, the additional administrative costs are minimal.
Second, mandate a policy run off date for all NFIP policies. Included in this run off date is the requirement for states to find a way to include flood in their residual markets. We all agree that a state residual market isn’t the market of choice, but they are better than a federal solution. Starting a year out from the run off date, the NFIP begins to nonrenew policies, guiding customers to the voluntary market, which should have built enough capacity to take on the additional risk.
To make this as simple as possible, we have to consider one question. Why do people buy insurance? It’s not for peace of mind. If someone is anxious about life, no insurance policy will help that. If they’re not that anxious, they won’t care about insurance. People buy insurance to pay costs that they can’t pay themselves.
Adding flood to their homeowners’ policy or commercial property policy means that only one underwriter (if any) ends up evaluating the risk, rather than two. Consider all of the additional steps, potential problem areas and traps that we eliminate by taking the NFIP out of the mix and adding flood as a covered peril. These efficiencies apply to many risks, but not all. There will still be some risks that the admitted market will not address. That’s what the surplus lines market or the state residual market are for.
We eliminate double applications. The insured simply has to answer a basic series of questions to get the quote. It doesn’t eliminate all of the extra questions that carries might ask (the self-service, app-based insurers will see to that). Once the voluntary market starts to write flood, it’ll become just another peril among others. They’ll figure it out. This also eliminates double underwriting, whether its automated underwriting, or live underwriting, it’s still only one process, rather than two.
We eliminate double claims adjusting. This is an issue when dealing with the question of what caused the loss. During Hurricane Irma (and every other hurricane that we remember), people suffered loss due to the hurricane and the flooding the happened. Which loss is covered by which carrier? If there’s no flood coverage, how much of the loss can be attributed to the hurricane and how much can be excluded because flood isn’t covered?
When multiple policies can apply to a loss, there are multiple adjusters working, independent of one another. Both of which are looking to pay out the appropriate amount on the claim, not too little, nor too much. Both adjusters can conclude that the other company is responsible for a portion of the claim. What happens next is predictable. Everyone gets to talk to the judge.
If, however, there is one policy that covers all applicable perils, there is one adjuster and there is no question about who pays the claim. There is no arguing that this part of the wall was damaged by the flood while this other part was damaged by the hurricane. The administrative burden goes down. The number of people involved goes down. The time to payment goes down. Legal bills go down.
Let the state handle it
You don’t want to hear it, but even if we get rid of the NFIP, there are some risks that the voluntary market just won’t write. They are too risky. They’ve probably already been flooded five times and the NFIP has already paid those claims. That’s where the states come in. A state residual market is better suited to handling the risks in the state than any federal program could. The state residual markets’ exposures would be based on what’s going on in the state.
Sure, some states have a higher overall risk than other states do. That’s good. That means that state A doesn’t have to subsidize state B in their risk pool. You’ll actually see flood rates that are actuarially sound state to state and if it costs considerably more to insure a property in Miami for flood than it does in Denver, that’s good. That means that people are actually discovering what it really costs to live someplace.
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