Hopes for Federal Property Insurance Expansion: Gone with the Wind

Insurance industry members are wiping there collective brow after a bill was pulled from the floor of the House of Representatives before a vote. However, every taxpayer in the US should be breathing a sigh of relief. The bill, H.R. 1264 proposed to add wind insurance coverage to the National Flood Insurance Program (NFIP), which provides federal coverage in the wake of a catastrophe. A persistent idea on the hill, the effort to add wind and other perils to the Federal insurance program has, in recent years, been championed by Rep. Gene Taylor, D-Miss., who lost his home during Katrina in 2005.

Whatever their intentions, adding another peril for the federal government to deal with is clearly a bad idea on all fronts–whether from a fiscal, public safety, or free market perspective. The NFIP is already more than $19 billion in debt and counting–a debt that is paid for by every American, regardless of where they live. Estimates claim that the addition of just wind would increase that liability 5-fold. Of course, as we can see by looking at other government run insurance programs, the longer they operate the greater the liability becomes–this is due in part to inefficient underwriting and in part to the moral hazard that subsidizing risky behavior represents.

On July 21, just days before House members planned to vote on the measure, the Obama administration announced its opposition to the addition of wind to the NFIP (as the Bush administration had done in 2008).

The Administration recognizes that the availability of hazard insurance is a key element in the ability of individuals and communities to recover from disasters. However, the Administration opposes House passage of H.R. 1264, which would expand the Federal Government’s role to provide windstorm insurance that is already readily available in the private sector and through State insurance plans without Federal aid….expanding NFIP to cover windstorm insurance would unnecessarily duplicate available insurance products and could “crowd out” such products where they are offered, while offering little to no savings to the American public. At a time when the NFIP is already facing serious challenges, the Administration cannot support such an expansion

There are several fundamental reasons why adding wind insurance to the NFIP is a bad idea.

1. It would undercut competition and increase the national debt:

Private insurance is available. It might not be as inexpensive as people living on the coasts would like, but private insurers are willing to underwrite almost any risk for an adequate premium. When the federal government provides a cheaper version of insurance (under-priced through the miracle of taxes) it prompts consumers to leave their private insurance company for the less expensive option.  This puts increasing pressure on the federal insurance and American taxpayer.

2. Government run insurance programs can’t spread risks as far as private insurance

Private insurance  companies can spread risk by holding policies around the world that are unlikely to occur at the same time. This means that while they are paying claims for a hurricane in Florida, they are still collecting money from premiums on Japanese earthquake insurance policies. The US government is necessarily limited to pooling all of its risk within the USA which makes it much more likely that events will occur at the same time.

3. Cheap insurance doesn’t discourage bad behavior

When priced correctly, insurance provides feedback for the relative riskiness of a person’s decisions. If someone buys a house on the SC coast, they are more likely to have their home destroyed in a storm surge than someone living in the middle of Wisconsin. Therefore, their private insurance company will charge them more money for hurricane insurance. When we remove this feedback (aka remove the expense of insurance from the decision to move to a home on the beach) we encourage more people to engage in risky behavior. If the federal government provides cheap insurance for homes on the beach more people will build their homes there–putting themselves and their homes at risk and increasing the likelihood that everyone else in the country will end up bailing them out.

While the bill could still be brought up, it is a good thing that the Administration and a large number of Representatives have expressed their opposition to this expansion of government. Of course, all of the arguments against federal wind insurance apply to all other forms of insurance as well.