AS CONGRESS WINDS down its current
session, there’s little doubt that plenty of bad ideas will pop out of
the woodwork as members put the finishing touches on legislation.
Unfortunately, one of the worst ideas to come down the pike in quite
some time—federal windstorm insurance—has gained some momentum. A
federal wind insurance program has already passed the House and,
although overwhelmingly rejected in the Senate, could end up attached
to National Flood Insurance Program renewal that Congress has to pass
between now and September 30.
In a way, it’s easy to see the
reasons for the program’s appeal. Under a bill from Mississippi
Democrat Gene Taylor that has passed the House of Representatives, the
federal government would add wind coverage to the existing National
Flood Insurance Program (NFIP). In theory, the move would cost the
taxpayers almost nothing nothing because the program would charge
“actuarially adequate” rates, encourage policyholders to do a better
job making their homes more resistant to windstorms, and make
communities adopt anti-hurricane zoning codes. Most importantly for
politicians and their constituents, the proposal would provide some
welcome relief from insurance premiums that have more than doubled in
many coastal areas.
But all this simply won’t work. Federal
wind insurance could potentially run up enormous bills for the
Treasury, would do almost nothing to make the country safer, and would
drive the private sector out of a large part of the insurance market.
Despite all the talk of actuarial adequacy, the program would—at minimum—result in an enormous transfer
of wealth to a few coastal states. This is because efforts to require
“adequacy” simply aren’t practical because the government’s definition
of adequacy really doesn’t jibe with the one that private companies use
(it discards a number of risk and overhead factors). Likewise, efforts
to stop the program from writing policies when it goes into debt seem
destined to be overturned: If enforced, they would require the program
to stop issuing new policies following a major disaster when, for
perfectly understandable reasons, interest in wind insurance would
spike. Congress would repeal them in a heartbeat.
Clinton administration official Robert Schapiro, who studied the
proposal, found that during a single hurricane season as bad as the
2005 season that brought Katrina, a wind program could cost the federal
government as much as $160 billion in 2009. And costs would rise over
time. By 2017, Schapiro and his co-author Aparna Mathur say, a wind
program could impose a $332 billion cost on Federal taxpayers.
top of this, the program would make the country less safe.
Hurricane-prone areas already have decent incentives to adopt stringent
building codes, and risk-based insurance rates offer the best sign of
all that a place is dangerous to live. By suppressing rates below their
free market levels, something the program would almost certainly do,
federal wind insurance would encourage development in places that it
shouldn’t happen. A house on a sand dune that has hurricane shutters
and roof tie-downs is still much more likely to fall apart during a
hurricane than is a perfectly ordinary house built several miles
Finally, the program simply isn’t needed. Although
real insurance affordability problems exist for some people of modest
means who live in coastal areas, the overall insurance and reinsurance
system has proven it can deal with major catastrophes. Hurricane
Katrina, the country’s largest-ever natural disaster, cost over $80
billion—private insurance payouts were almost exactly half that—but
didn’t drive a single major insurer or reinsurer out of business. In
fact, the only entities that got into serious trouble were
state-mandated wind insurance programs.
insurance, quite simply, violates sound insurance principles. It’s a
terrible idea that Congress should leave by the wayside.