Bidding Bon Voyage to Nationalized Wind Insurance

According to several Gulf Coast legislators, the idea of adding wind insurance to the National Flood Insurance Program is not going to happen anytime soon. The “Taylor bill,” named for the Rep. Gene Taylor of Mississippi, failed to pick up support despite several attempts by Taylor — a result that made all free-market supporters and anyone not wishing to pay for beach homes in Florida breathe a sigh of relief. Recently, in an interview with the Mobile Press-Register, Mississippi Republican Rep. Steven Palazzo, who defeated Taylor in the 2011 midterm elections, confirmed that he is not going to support the idea of adding wind coverage to NFIP: “If that (Taylor) bill would have a chance of passing, I would support it. I would endorse it… I think that ship has sailed.”

Rep. Jo Bonner, from Mobile, also stated that he thought it was “highly unlikely” that Taylor’s proposal would be adopted.

Even former Rep. Gene Taylor himself expressed doubts that his proposed expansion of the national insurance program would go far, giving it a “snowball’s chance in hell.” The National Flood Insurance Program (NFIP), which insures about 5.5 million Americans, is in serious trouble and has been for decades. Currently, the program — which is part of FEMA — is more than $18 billion in debt and is set to expire in September 2011. Part of the reason for NFIP’s dire situation can be attributed to Hurricanes Rita and Katrina, but the core problem is that insurance can’t operate when it is run by politicians (who, by their nature, care more about their popularity than the fiscal solvency of an insurance program).  First of all, the maps that are used to set rates on policies are severely out-of-date. This means that homes that appear to be sitting in a place where they are not likely to flood actually could be in high-risk areas. The program undercharges these policyholders and thereby doesn’t have the money to cover the losses. Attempts to update the maps have been met with resistance because the result will be that some folks will find out that they are now in flood zones (as if they didn’t know already from annual flooding) and end up with higher rates.

Illinois Rep. Judy Biggert currently has a proposal in draft form which would overhaul the program and re-draw the flood-maps to reflect actual risk. That proposal is politically unpopular as the change will likely raise the rates of many policyholders. But such politically unpopular moves are necessary in insurance — which is one reason the government should never write insurance. Another problem is that government insurance, which is often meant to be “affordable” in high-risk areas like coast lines, encourages building in these risky areas and does not encourage the risk-avoidance behaviors that high insurance premiums from private, profit-motivated ventures would — such as storm shutters or raising the building above sea level. Instead, builders continue to flock to the shorelines, creating an even larger risk that the depressed government insurance rates can not cover.

Biggert’s proposed change to the program has received a mostly positive reception, especially among politicians anxious to deal with government debt. More than anything, the proposal is designed to restructure the program so that it can begin to gain a sound financial footing by allowing the rates to more accurately reflect the risk of policyholders.

The bill would require rates for some properties to be raised 20 percent a year until they reflect actual risk and would allow the NFPI to raise rates on other properties as well (currently, the program can’t raise rates by more than 10 percent a year). Additionally, owners who find themselves in flood zones as a result of the newly redrawn maps will have rates raised to 50 percent of the newly determined risk in the first year and then raised 20 percent a year until they reflect actual risk.

Finally, the proposal calls for two studies to be done on the program within 18 months that would examine privatizing the program. According to Rep. Palazzo, bringing the private market back to the gulf is an essential part of any solution to the current problems there.

The less “public” the better — for residents of the Gulf Coast as well as taxpayers across the country.