Insurance Lessons from Alabama

While Alabama certainly has some ambiguous laws and archaic regulations, the federal government ought to take a lesson from Alabama when it comes to property insurance.

In an effort to keep the state’s insurer of last resort solvent (meaning it will have enough money to pay the claims people are likely to file), Bob Groves, manager of the state-run insurer, announced that they will no longer issue policies for homes built over or standing in water.

People who currently hold policies on a building in or over water can keep the insurance as long as they own the building and pay the premiums. But the association will not cover the new owners, and it will drop coverage when water encroaches on a building that is now on land.

While this will only affect 400 out of the 18,000+ policies held by the Alabama Insurance Underwriting Association, over time this policy will make the state-run insurer more stable and could potentially shrink the facility a little.

This is policy the federal flood insurance facility should emulate. As I wrote back in August, when it comes to the National Flood Insurance Program, a division of FEMA, some in Congress have been doing just the opposite. They are attempting to expand coverage so not only are homes that repeatedly flood covered, but also homes that are likely to suffer wind damage.

One of the results of NFIP’s covering high-risk properties and undercharging premiums is that its debt has ballooned and it requested a bailout to the tune of about $20 billion.

The problem occurs when the government, either state or federal, starts underwriting property insurance at reduced rates. This encourages people to continue risky behavior, to forgo mitigation efforts (like cutting down trees, raising property, hardening roof structures), to continue building in risky areas, and it pushes out private insurers who can not compete with taxpayer-funded insurance facilities.

While the best case scenario is that the Alabama state-run insurer gets completely out of the market, this is one small step toward solvency. At least they are less likely now to need a bailout from the federal government (the American taxpayers). Hopefully those in Congress will learn a little something from the Yellowhammer State.