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?”
We know the answer. 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. It’s 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.
FLOOD INSURANCE BACKGROUND NATIONAL PICTURE
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 was designed to be self-supporting in average years; the program has lost money in three of the past eight years.
As a result of Hurricanes Rita and Katrina in 2005, the NFIP borrowed from the U.S. Treasury to cover claims. It now owes the Treasury about $17.5 billion and must pay about $900 million in annual interest payments. With its total premium income about $3.1 billion annually, the NFIP will likely be able to pay only the interest on its loan.
To address this imbalance, Congress adopted the Biggert-Waters Flood Insurance Reform Act in 2012. The legislation requires the NFIP to raise rates to reflect true flood risk.
These 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.
Most residences immediately lose their subsidized rates if the property is sold, the policy lapses, there are repeated and severe flood losses occur or a new policy is purchased.
• 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.
• 115,000 non-primary residences, business properties and severe repetitive-loss properties (5.7%) are subject to the elimination of subsidies once FEMA develops guidance for their removal.
U.S. LOSES FREEDOM FOR 7TH YEAR IN ROW
The Heritage Foundation and Wall Street Journal published this week their 20th annual world Index of Economic Freedom. For the first time in the rankings’ history, the United States dropped out of the top 10.
In 2006, the U.S. reached its highest rating (sixth), ranking among those nations regarded as economically free. Now the U.S. is considered “mostly free.” The U.S. received its lowest scores in the categories of government spending and fiscal freedom.
With this year’s ratings, the United States is the only country to have recorded a loss of economic freedom each of the past seven years.
What is economic freedom? According to the index’s authors: “Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.”
1. Hong Kong 4. Switzerland
2. Singapore 5. New Zealand
3. Australia 6. Canada
7. Chile 21. Lithuania
8. Mauritius 22. Georgia
9. Ireland 23. Iceland
10. Denmark 24. Austria
11. Estonia 25. Japan
12. United States 26. Czech Rep.
13. Bahrain 27. Botswana
14. U. Kingdom 28. UAE
15. Netherlands 29. Macau
16. Luxembourg 30. Qatar
17. Taiwan 31. South Korea
18. Germany 32. Norway
19. Finland 33. Saint Lucia
20. Sweden 34. Colombia
169. Rep. Congo 174. Eritrea
170. Timor-Leste 175. Venezuela
171. Turkmenistan 176. Zimbabwe
172. D Rep. Congo 177. Cuba
173. Iran 178. North Korea