This is a classic — the saga of flood insurance. It’s the classic Milton Friedman description of the law of laws. That is, creating a law to address a problem, only to discover that the law created unintended consequences, which require more laws that have even more unintended, adverse consequences.
And on and on the merry-go-round goes. Where it ends nobody knows.
Florida Sen. Jeff Brandes and Rep. Larry Ahern, two St. Petersburg Republicans, are hoping the merry-go-round may end with Senate bill 452, a private-sector antidote to the flood-insurance ills that threaten so many Floridians.
Let’s start with a recap. In the late 1960s and early 1970s, when private insurers abandoned flood policies because of their unpredictability, costs and losses, our political geniuses in Washington did what they always do. They decided the federal government should get into the flood-insurance business. Obviously, without regard to its record in such endeavors, congressional thinking was the federal government could do it better than free enterprise.
Forty years later, here’s how that turned out: The National Flood Insurance Program is $17 billion in debt to the federal treasury and can’t afford to pay more than its $900 million annual interest payment on its loan. And, in the 40 years hence, the NFIP’s under-priced premiums have subsidized a massive build-up of homes and properties in even more flood-prone areas than before. Currently, the NFIP insures 5.6 million properties nationwide, a book of business that totals $1.25 trillion in value.
In the words of Dr. Phil, “How’s that working for you?”
Not so swell. In its inimitable wisdom Congress decided last year to fix its flood-insurance debt and underpricing by quickly ratcheting up NFIP’s premium rates.
We’ve all read the horror-story results: widows, orphans, senior citizens, average homeowners and small-business owners suddenly unable to afford their skyrocketing flood premiums and on the verge of losing their homes.
Oops. After the predictable public wailing and the threat to their careers, congressional members backtracked on their plan to quit having taxpayers subsidize all those people living in flood zones. Our own Rep. Vern Buchanan and Sen. Bill Nelson were among the champions over the past six months to persuade Congress to delay the exorbitant rate increases … Until it finds a permanent solution.
Sorry, there is no permanent solution. There are only choices. And if the choice is to make the National Flood Insurance Program actuarially sound, much higher flood premiums are inevitable. Its’ safe to say Congress will figure out a way to phase in those higher premiums at a more palatable rate — less than the 25% a year, or less than immediately resetting rates when a home is sold.
All the while this drama was unfolding in Washington, Sen. Brandes over the summer began looking for a way to bypass Washington and fix the problem at the state level.
Why not free enterprise? Brandes thought. What would it take to create incentives for the private-sector insurance companies to underwrite flood risk?
Brandes says he broached the idea with reputable reinsurers. And surprise, here was their answer: They want flexibility.
Flexibility on rates, deductibles, maximum limits, exclusions and rate-filing procedures. Essentially a free-market approach.
While this scares consumers who think all insurers are plunderers, that’s what Brandes and the Senate Banking and Insurance Committee devised — flexibility, along with some consumer safeguards. As Brandes put it, if the state were to allow insurers the leeway to customize policies, the state would want assurance that the companies selling flood policies had the financial werewithal to fulfill claims and were not charging below-market rates to win market share quickly.
Brandes believes, if approved, it would be a few months before a new private-sector flood-insurance market would take hold.
There’s one catch, a big one — the banks. And they will be part of the unintended consequences that have arisen over the years.
Current law requires banks and mortgage brokers who sell federally backed mortgages to require homeowners in flood plains to carry flood insurance. Federally backed mortgages also require property insurance from A.M. Best-rated insurers.
Given that, even if the Legislature allows for a free-enterprise flood-insurance market, the question will arise: What will the banks do? Will they approve a mortgage to a home buyer who wants to buy flood-insurance from an unrated insurer, even though the state of Florida has given its approval to operate? As one insurance lobbyist told us, not likely. Banks don’t take those kinds of risks.
Nonetheless, the Sen. Brandes gambit is worth the experiment.
Early on, in the forming of the republic, the founders envisioned the states as cauldrons of experimentation and competition. This is one of those times.
The federal government, no surprise, has proven to be totally inept as the one-size-fits-all market for flood insurance. And the likelihood of Congress finding a “permanent solution” is about as likely as it balancing the federal budget.
While the Brandes bill and concept may have its skeptics and unknowns, here is an opportunity for policy makers to let go and see whether the incentives are such that the free hand of the market will fill a need.
+ Jobless benefits no benefit
As with any debate over social programs, lawmakers in Washington are scrambling to look like the “good guys” on whether to extend emergency unemployment insurance.
They shouldn’t. Extending unemployment insurance is a poor policy choice that will lead to more unemployment.
French political economist Frederic Bastiat, late of the 1850s, and many economists since have noted the same thing about people: It’s human nature for everyone to want to expend the least amount of effort to maximize his own benefit.
“Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices,” Bastiat wrote. Every human decision can be boiled down to maximizing one’s own cost-benefit ratio.
Given that, what incentive does a person on unemployment insurance have to seek a job when he’s guaranteed money from the government for doing nothing? Mind you, the unemployed is not just receiving an unemployment check. Many are also receiving food stamps and free health care through Medicaid.
A recent working paper by Princeton economist Henry Farber and Federal Reserve researcher Robert Valetta found that extended unemployment insurance lengthened the average time for the unemployed by 7% and added 0.4 percentage points to the unemployment rate.
What’s more, government borrowing and spending to fund unemployment benefits has the effect of crowding out the private sector’s access to capital to create jobs and wealth. Regardless of what President Obama and Nancy Pelosi say about unemployment benefits boosting economic activity, government spending to the unemployed is redistribution — taking wealth from the productive and transferring it to the unproductive. There is no net gain.
Is it any wonder that the labor participation rate is near all-time lows at the same time unemployment and disability benefits and food stamp usage are at all-time highs?
Why expend the effort and work to find a job when you can get paid for doing nothing?
FLOOD INSURANCE BACKGROUND
• In 1973, Congress passed the Flood Disaster Protection Act, mandating property owners with mortgages issued by federally regulated or insured lenders to purchase flood insurance if their properties are located in Special Flood Hazard Areas.
• The National Flood Insurance Program owes the Treasury about $17.5 billion and must pay about $900 million in annual interest payments.
• The Biggert-Waters Flood Insurance Reform Act of 2012 requires the NFIP to raise rates to reflect true flood risk. The changes have resulted in premium rate increases for second homes, business properties, severe repetitive-loss properties and substantially improved damaged properties of 25% per year until premiums meet the full actuarial cost of flood coverage.
• More than 2 million Florida properties have national flood insurance.
• 268,500 policies statewide, or 37% nationally, receive a federal subsidy.
• Properties insured in Florida have paid about $3.60 in premiums for every $1 received in claims payments.
• About 50,000 secondary residences, businesses and severe repetitive-loss properties (2.5%) are subject to the annual 25% increase in premiums.
• About 103,000 primary residences (5%) will lose their subsidy if the property is sold, the policy lapses, the property suffers severe, repeated flood losses, or a new policy is purchased.
CHALK UP GOODWILL
One of the first lessons our mothers teach is to clean up our messes.
Now, the city of Sarasota is mulling options to clean the remnants from the 2013 Sarasota Chalk Festival.
The fading street art along Pineapple Avenue has drawn the ire of many business owners in Burns Court — most only willing to voice their concerns anonymously.
Don’t get us wrong, the Chalk Festival is a great event that provides a wealth of benefits — cultural, social and economic — to the city. Kudos to the persistence and creativity of founder Denise Kowal.
But a permit from the city of Sarasota to allow the event required festival producers to clean the affected streets by Dec. 18.
Kowal tells us initial efforts to remove the street art encountered issues with the contractor. She says she plans to make another attempt before the city intervenes.
Given the angst the Chalk Festival engenders among some downtown business owners and the city, for the sake of the festival and overall goodwill, the final cleanup shouldn’t become a burden — however small it may be — for taxpayers.