RSS Feed MenuFor the past several years, Congressman Gene Taylor (D-MS) has been on a mission to add wind damage coverage to the National Flood Insurance Program (NFIP), which is already swimming in red ink.
His legislation, called the “Multiple Peril Insurance Act,” was slated to be voted on by the House of Representatives twice in the weeks before Congress left town for its August recess. The Democrats’ Daily Whipline announcing the floor schedule urged a yes vote on Taylor’s bill, but luckily for taxpayers, both times the leadership decided to pull the bill for lack of support.
Taylor and the Democrat leadership are concerned that it is hard for folks living in storm-prone coastal areas to get reasonably-priced wind insurance from private insurance companies.
Well, there is a very well understood reason for this. It is called RISK. Homes built in hurricane country are at high risk of exposure to wind damage.
With NFIP already $18 billion in the red and, according to a recent Government Accountability Office (GAO) report, unlikely to ever repay what it owes to the U.S. Treasury, the notion of adding wind insurance to this already troubled program should make any taxpayer cringe.
The biggest problem with NFIP is repeated claims for properties that suffer flood damage over and over again. Because of this, 1 percent of the covered properties account for almost 30 percent of the claims paid out by the program. The number of “repetitive loss” homes has more than doubled in the last 15 years.
A recent Houston Chronicle story revealed that between 1977 and 1995, NFIP paid out $806,591 for repeated storm damage to a suburban Houston home that was valued at $114,480.
Now, imagine this same program trying to provide low-cost coverage for beachfront homes that are regularly exposed to hurricanes and other coastal storms.
It stands common sense on its head to shift risk and costs away from the owners of coastal properties who are incurring them, and onto those Americans who live inland—far away from the risky ambiance of the shore.
Beyond the legislation’s fiscal insanity and lack of fairness, it is equally bad from an environmental perspective. Taxpayer-subsidized wind insurance encourages building in environmentally sensitive coastal environments, particularly wetland areas that would otherwise provide a natural buffer against storms.
Congressman Taylor took umbrage at environmental group opposition to his bill and sent a harshly worded letter to all of his fellow House members calling environmental opposition to his bill “offensive.” He accused environmental groups of siding with the insurance industry to deny coastal residents access to “reasonably-priced hurricane insurance.”
In the same letter, Taylor also claimed that under his bill NFIP would charge actuarially-sound premiums. If the risk exposure was such that “reasonably-priced” premiums would also be “actuarially-sound,” then why is private insurance too expensive or non-existent, and why are state efforts to fill the gap breaking under the weight of liability exposure?
The only real solution is for individual property owners, real estate developers, and coastal communities to act responsibly and minimize the risk of storm damage through smarter building standards. That means storm-conscious siting and design of homes, storm-hardened construction, and preserving wetlands and other natural buffers.
That prudent solution, unlike Congressman Taylor’s costly beach house bailout, would not only lower the cost of insurance premiums, it would protect homeowners from having to endure disruptive and heartbreaking storm damage in the first place.
Oldskool // Aug 22, 2010 at 10:53 am
Maybe I missed it but I didn’t see the word “flood” anywhere in this column which leaves a reader suspicious.
We know how insurance companies deal with flood damage: unfairly. If the wind causes a surge of water, they’ll say you should’ve had flood insurance. But if you live on a beach, what are the chances you’ll ever see a flood much less have to file a claim?
When the wind slams a two-by-four into your house, are you also supposed to carry two-by-four insurance?
Most problems Congress tries to solve are the result of bad business practices. And insurance companies are like the Mafia with a business license.
sdspringy // Aug 22, 2010 at 12:07 pm
Nonsense, every heard of Tornadoes? Guess what, covered, and that, I’m pretty sure involves wind. The wind in this case is the Dem/Lib kind which wants to blow open your wallet.
Homes inland from the coast receive damage from hurricanes and are also covered. This idiot just wants a low cost, taxpayer subsidized, insurance program for portions of his district.
You want to build a home on the Gulf coast, so you can walk the beach, then pay for the privilege. I am not responsible to ensure you have low cost homeowner insurance, nor am I willing to subsidize it.
Oldskool // Aug 22, 2010 at 12:18 pm
“Homes inland from the coast receive damage from hurricanes and are also covered.”
What a planet did you fall off. Ever heard of Katrina? Ever heard about the homeowners who lost everything because insurance companies denied their claims? If insurance companies dealt in good faith, the gubmint wouldn’t have to get involved.
sinz54 // Aug 22, 2010 at 1:14 pm
Oldskool: What a planet did you fall off. Ever heard of Katrina? Ever heard about the homeowners who lost everything because insurance companies denied their claims?
That’s not what I heard.
What I heard was that their policies insured them against damage that was directly due to the hurricane. But many of these homeowners hadn’t purchased flood insurance, which is what they needed for claims due to the levee breaking and flooding their homes. So the insurance company only paid for the wind and rain damage, not the flood damage.
Hurricane insurance isn’t flood insurance; it’s basically insurance against wind and rain.
And I agree with Mr. Jenkins that for the Government to help provide flood insurance to homeowners whose homes are below sea level, amounts to a giant bailout in advance. The Government might as well just send these homeowners direct cash payments in advance, since it’s a sure bet that they will be flooded one of these days.
Insurance is supposed to protect you against unlikely catastrophic events. Not against the inevitable.
Hey, maybe the Government should provide cheap snow insurance to us folks in New England. Who knows, it could actually snow there someday.
Ruminant // Aug 22, 2010 at 2:58 pm
August 22nd, 2010 at 10:23 am DAVID JENKINS
Congressman Taylor took umbrage at environmental group opposition to his bill and sent a harshly worded letter to all of his fellow House members calling environmental opposition to his bill “offensive.” He accused environmental groups of siding with the insurance industry to deny coastal residents access to “reasonably-priced hurricane insurance.”
But it sounds like the insurance agencies already offer “reasonably-priced hurricane insurance” to coastal residents. What’s more reasonable than requiring people who live in hurricane-prone areas to pay more for hurricane insurance?
If there was a national benefit to letting people build houses right on the beach, then Taylor’s bill might serve a purpose. We might decide as a nation that it’s worth paying more in taxes so that people can get cheap hurricane insurance on coastal property. But I don’t think there is such a benefit.
sinz54 // Aug 22, 2010 at 1:14 pm
Hey, maybe the Government should provide cheap snow insurance to us folks in New England. Who knows, it could actually snow there someday.
I’ll support your snow insurance if you support cloud and fog insurance for those of us on the West Coast.
baw1064 // Aug 22, 2010 at 6:14 pm
As I understand it, one of the problems post-Katrina (not so much in New Orleans, where the levee failure was clearly responsible and the houses would otherwise have been intact, but rather in MS) is that when a house is reduced to a pile of driftwood after 100 mph winds and a 15 foot storm surge, it’s a little hard to say with certainty whether the house was blown over before it was washed away, or vice versa, and therefore which type of insurance claim should occur. Few people had the foresight (aka stupidity) to try to document the destruction in real time on video…
But since two types of insurance are involved, both insurers will try to point the finger at one another, since it gets them off the hook for paying. Which means the homeowner, even if he did have both types of insurance, is liable to be caught in the middle for an extended period.
So actually the idea of having one insurer handle both situations simplifies things. But that being said, is there a good reason why the private sector can’t insure against floods? I’ve never heard a good explanation given. Can anyone provide one?
bubba11 // Aug 22, 2010 at 11:11 pm
I live in Missouri (nowhere near the Mississippi River) and actually it would not benefit me to purchase flood insurance, because I’m supposedly not in a flood plain in my area, and flood insurance wouldn’t cover anything in the basement damaged by floods. However, I am covered for volcanic activity, which is funny, considering that I don’t live anywhere near a volcano.
jbmdc // Aug 22, 2010 at 11:19 pm
First, let me acknowledge that I work for Gene Taylor and I probably should not bother commenting here but it is my Sisyphean task for the past four years to try to enlighten all the people who form their opinions about my boss’ bill before they know any facts or understand the economics.
It is offensive to call this a beach bailout because coastal regions are responsible for a larger share of GDP than inland areas. Coastal areas are homes to major ports, shipyards, Navy and other military bases, the oil and gas industry, the seafood industry, and many other industries that need to be near the water or near major shipping routes. Yes there is the tourism industry also. The luxury hotels, condos, and casinos can get insurance coverage from the private market. It is the shipyard workers, the military families, and the local small businesses who are forced to pay premiums that are about 5 times more than their expected claims.
Here are the simple economics: homeowners and business owners are required by their mortgages and lenders to buy windstorm coverage but insurance companies are not required to sell it to them. After Katrina, as after Andrew, insurance companies have severely reduced their exposure in coastal areas. It is not that they can’t charge high enough premiums. They are charging much more than they expect to pay in claims. The reason private companies do not want to cover flood, earthquake, and now hurricane wind insurance is because every year they would have to account for a huge amount of capital in case there were a catastrophic event. They don’t want to tie up that much money that way. They want to have predictible profits to cover their bonuses and investor returns. They prefer predictible lines of insurance such as auto or fire where every year is more or less the same.
Since Katrina, private insurance companies have stopped writing policies in coastal areas or are cherry-picking to cover only the high-end properties. The rest are dumped into state-sponsored wind pools, the insurers of last resort that the industry has forced each state to create. Since Katrina, the state pools have picked up more than $345 billion in new insurance, but they do not have the ability to build up the reserves to cover a major hurricane, so they have to beg Lloyds and the Bermuda reinsurers to sell them reinsurance coverage every year. Those reinsurance costs are absurdly high – Mississippi’s wind pool paid $65 million for $470 million of reinsurance coverage, a premium of 13 percent for what is supposedly a 100-year or 1 percent chance event. Last year the South Carolina wind pool collected $96 million in premiums and paid $86 million in reinsurance premiums and $12 million in agent commissions and administrative costs. It lost $2 million before the first claim. It covers nothing. It just collects reinsurance premiums for Bermuda investors.
The Mississippi wind pool, a stand-alone insurance pool providing wind coverage for three counties on the Gulf Coast, is the worst possible way to insure that risk. The pool has to account for enough capital to pay on almost every policy from a single storm. Insurance only works economically if the risk pool is diversified. A federal insurance pool, even with risk-based, actuarial rates, would spread the risk geographically along the Gulf and Atlantic so that only a small portion of the pool would be affected by a single storm. The federal pool would have lower capital costs than the combined costs of state-by-state wind pools that each has to account for enough money to pay on a locally concentrated pool.
The other big issue is that after Hurricane Katrina, private insurance companies pushed a few billion dollars of their wind losses onto the federal flood insurance program or onto federal taxpayers. NFIP let the private companies adjusters handle both claims with no oversight and the companies took advantage of this conflict of interest to blame everything possible on flooding. State Farm told its adjusters that if wind and flood both caused damage, that only the flood policy would pay. Nationwide argued in court that even if a house were 95% damaged by wind before the storm surge, Nationwide would not owe a dime if the storm surge was strong enough to destroyed the home anyway. Besides the NFIP overpayments, the denials of wind claims led to federal taxpayers paying billions of dollars to provide FEMA trailers, rental assistance, grants, subsidized loans, and casualty loss tax deductions to shelter people for two or three years or so while they sued their insurance companies. NFIP also had to pay billions because of catastrophic levee failures, not really the fault of the flood program. Our wind insurance would be available only in combination with a flood policy, and only if the local government requires the wind mitigation standards of the International Building Codes. This bill does not encourage risky development. It brings in stronger mitigation standards, not as a federal mandate, but as a requirement if you want to participate in the federal insurance program.
The Taylor bill is not asking for any subsidy for anyone. We don’t want taxpayers to pay billions of dollars for FEMA trailers and homeowner grants and the other inefficient programs to assist homeowners because their insurance policies did not cover their hurricane damage. Coastal property owners need to be able to buy hurricane insurance that will pay claims fairly and promptly without requiring them to separate the wind loss from the flood loss. We are trying to save taxpayers and homeowners billions of dollars by meeting a demand for seamless hurricane insurance that the private sector refuses to address.
cdorsen // Aug 23, 2010 at 10:09 am
This all boils down to one thing: people in this country continue to want in greater and greater numbers for others to pay their bills. Basically, it says this, “I want to have a nice beach home of which I can afford and you in all likelihood cannot. While I can afford the home, I cannot afford the additional insurance because of the great risk involved. I want you, the taxpayer, to subsidize the risk while attempting to afford your own home and risk at your own expense. That would make life great for me!” We HAVE to stop subsidizing everyone and everything. At some point, you assume the risk and when the inevitable happens, you assume the loss and responsibility. If you cannot afford the loss or insurance to cover it, you cannot afford the home. Live elsewhere, end of story.
baw1064 // Aug 23, 2010 at 10:30 am
jbmdc,
Thanks for your thoughtful reply. I will have to look at it in more detail and respond later, but I wanted to say a quick word of thanks for laying out the case for the proposed legislation.
djenkins // Aug 23, 2010 at 11:10 am
jbmdc wrote: “Mississippi’s wind pool paid $65 million for $470 million of reinsurance coverage, a premium of 13 percent for what is supposedly a 100-year or 1 percent chance event.”
Does anyone actually believe that Missisippi being hit by a catastrophic hurricane is a once in a 100 year event? If that were actually the case, why wouldn’t insurance companies be more than willing to collect 100 years of insurance premiums for every major payout?
By paving over everything we have hardened our watersheds to the point that what used to be a 100-year flood event is now more like a 10-year flood event. Similarly, by over developing our shorelines and removing natural buffers, we have greatly incresed vulnerability to coastal storms–and that does not even take into account possible climatic changes. Coastal overdevelopment has also dramatically increased the scale of property damage associated with these storms.
It is a big problem, but not an unforseeable one, and not one that should be placed on the shoulders of every taxpaying American.
jbmdc // Aug 23, 2010 at 11:54 am
djenkins,
I do not meant to imply that a catastrophic hurricane is only a 100-year event on the Mississippi Gulf Coast. What I mean is that supposedly it would take a 100-year event to exceed the amount of reinsurance coverage.
At the time of that reinsurance purchase, the Mississippi wind pool had about $6 billion of insurance in force distributed over an area roughly 70 miles along the Gulf Coast by 25 miles inland. The wind pool board, which includes 5 representatives of insurance companies, hired industry risk modelers to determine how much damage a 100-year event would cause to the wind pool portfolio. The answer at that time was $570 million, so the wind pool decided to buy $470 million of reinsurance for a $570 million loss, and be on the hook for the other $100 million in deductibles and self-insured retention.
Remember this is only for the wind damage, not the flood damage. From Katrina, there were some total losses due to wind, but most wind claims were for moderate damage. The average wind pool claim in Mississippi was less than $50,000, while the average flood claim was $140,000.
The risk modeling is not a public document, but presumably a 25-year storm would cause $150 million or so in losses; a 50-year storm would cause $250 million to 300 million, and so on. Those lower layers of reinsurance are more expensive because they are more likely to be reached.
If you are attempting to justify the reinsurance costs, I have just one point:
If the reinsurance prices were reasonable and appropriate, then State Farm, Nationwide, Allstate, Travelers, USAA, and all the other big insurance companies would be buying reinsurance and selling policies. They don’t do so because they know the reinsurance price is too high for the coverage. The wind pools are stuck with inelastic demand, they have to buy reinsurance because they do not have the reserves and are required to take all policies dumped into them by the insurers. They are forced to overpay for reinsurance because they have no choice.
No choice and no transparency and no protection from conflicts of interest = no free market pricing or efficient allocation of capital.
jdipeso // Aug 23, 2010 at 2:14 pm
Congress should consider legislation authorizing interstate compacts among state wind pools, so at least the risk could be pooled on a broader scale without unnecessarily exposing taxpayers in states outside of hurricane country to the real financial risks of adding wind coverage to the already stressed flood insurance program.
CO Independent // Aug 23, 2010 at 2:38 pm
@ jmdc
Your task seems Sisyphean because people are smart enough to understand that you are lying to them. The economics are even simpler than you suggest. Insurance companies are pulling wind coverage because state insurance commissioners are forcing insurance companies to charge rates that are insufficient to recoup anticipated losses. Government manipulation of the market place has created this problem. Further manipulation is not likely to resolve it.
Why should property owners in other states subsidize the risk of building in a Hurricane zone?
Stewardship // Aug 23, 2010 at 3:59 pm
I cannot think of one government (fed or state) program for flood or hurricane insurance that is not a subsidy (paid for by all taxpayers) or that does not incentivize poor decisions (paving wetlands).
A lot of those “jobs” alluded to by the Congressman’s staffer are jobs that once resided ‘up north.’ The employers moved south in pursuit of lower utility costs. They can always move back north to escape hurricane insurance or perils.
jbmdc // Aug 23, 2010 at 6:31 pm
CO independent,
We are talking about Texas, Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, North Carolina. These are not states with anti-industry insurance commissioners. With the possible exception of Florida, these are states where the insurance industry gets to do whatever it damn well pleases.
Stewardship,
Follow the money and do the math. Taxpayers are subsidizing the insurance and reinsurance companies, not homeowners or business owners or coastal residents. The policy holders are paying more than their risk, but the money is going to Bermuda reinsurance investors rather than building up reserves in the insurance pools.
Without New Orleans, places like Memphis, St. Louis, Louisville, Cincinnati, Pittsburgh, and every other Mississippi, Ohio, Missouri River city would never have had the wealth that created them. Fortunately for those inland river cities, taxpayers we have subsidized their protection by building large dams, levees, spillways, and other flood control structures to protect them from their rivers.
And all those inland farm states could not survive long without generous disaster assistance and multiple peril crop insurance backed by the taxpayers. Farmers don’t have to buy separate policies for flood, drought, windstorm, freeze, etc., but if it is such a good idea for coastal property insurance, why not make the farmers buy separate policies for every peril? Because it would be bad for everyone but the insurance companies, just as the current coastal property insurance set up serves no one but the insurance companies.
As taxpayers, would you really rather pay $7 billion to provide FEMA trailers to displaced residents than to allow the government to set up a system to charge actuarially priced premiums for insurance that would cover hurricane damage without disputes or delays over the cause of the damage?
CO Independent // Aug 24, 2010 at 9:06 am
>> We are talking about Texas, Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, North Carolina. These are not states with anti-industry insurance commissioners. With the possible exception of Florida, these are states where the insurance industry gets to do whatever it damn well pleases.
No, they don’t. You’re lying. And as I said, your task seems Sisyphean because people are smart enough to understand that you are lying to them.
Here’s a tip: there is this thingy called the internet which enables ordinary people to fact check your assertions. That’s how I know you are lying:
Here’s a link to one (of many) articles covering how Mississippi’s insurance commissioner limited State Farm’s rate request:
http://blog.al.com/live/2009/12/state_farm_raises_mississippi.html
Ditto for Alabama:
http://slabbed.wordpress.com/2009/12/03/allstate-cancels-thousands-of-policies-in-coastal-alabama/
I could go on and on, but I will trust that you know how to use Google. Insurance companies are making a rational decision to withdraw from wind coverage because state insurance commissioners will not permit insurance companies to charge rates that permit them to recover losses.
djenkins // Aug 24, 2010 at 10:02 am
jbmdc, you are really missing the point. This is about personal responsiblity and the proper role of federal government. In citing past government actions, you seem to assume that they were right.
Given what we know today about the value of wetlands, the false sense of security provided by levees, and the long-term infrastructure cost to taxpayers, I think it is fair to say that in hindsight many of the dams, levees and other attempts to re-engineer nature were a mistake. Your boss has even pointed to failed levees as a big problem with NFIP.
From a risk perspective, how is a decision to live along the coast in a storm-prone area any different than a decision to live in a floodplain? If you live in a floodplain you should expect and be prepared for a flood, if you live in the desert you should expect water to be somewhat scarce, and if you live along the Gulf coast you should expect and prepare for hurricanes. Why should others who choose to live in a less risky area be forced to share the risk exposure resulting from coastal development?
If a developer wants to build a large housing development on the slopes of Mount St. Helans would it be your responsibility as a taxpayer to guarantee the developer and everyone who lives there affordable volcano insurance? Actually, that would probably be a better gamble than what your boss is proposing.
I am not saying that reforms are not needed, just that Congressman Taylor’s legislation is the wrong type of reform.
jbmdc // Aug 24, 2010 at 11:15 pm
You are lecturing the wrong side. We are very much in favor of personal responsibility. And corporate responsibility. And government responsibility. Always have been. Our bill would not encourage risky development or subsidize risky behavior. We want people to be responsible and build stronger and safer and pay risk-based, actuarially-sound premiums for hurricane insurance but we also want the insurance to actually cover hurricane damage rather than trying to defraud customers and taxpayers and we want the government to protect homeowners and taxpayers instead of protecting the insurers that cheat them.
I agree that the flood program should prevent people from building in certain places, but the reason it fails at this because the major decisions in the program have been turned over to insurance companies, contractors, and local governments. The program to buy out repetitive loss properties instead of allowing them to rebuild does not work because the state and local governments have to agree to the deal and pay a cost share. Communities that recently suffered a disaster are not very likely to spend their local dollars to take property off their tax rolls. Policymakers were so afraid of giving the federal government any authority over local land use that they created a system that empowers local governments to make bad decisions that the federal taxpayers have to pay for over and over. Yet, the flood program is about the only restraint on development in many places. The flood program smuggles in elevation and building requirements as a condition of participation. The problem is that many of the maps are not accurate, but most communities are in denial about their flood risk until they have a catastrophic flood. This is not a just a coastal issue. Every year we have flood events such as in Nashville where far too many people who should have had flood insurance were told that they did not need it by their insurance agents, Realtors, bankers, city leaders, etc.
Another huge problem with the flood program is that the insurers have been allowed to loot it. They sell the policies and keep 30% of the premiums right off the top, but they actually spend much less than that in administrative costs. Then when they adjust claims, they are overpaid again far beyond their actual expenses. And after a major hurricane they get to send their adjusters in with a conflict of interest and bill as much as possible to the flood policies without proving how much was due to flood and how much was due to wind. There were about 8 GAO reports after Katrina ripping the pathetic management and oversight of insurers and contractors, but FEMA has done nothing to fix it and this Administration is a clueless as the last one.
As for the rate regulation post above: Get real. That state rate request game is scripted. They ask for an outrageously high premium increase and then the insurance commissioner gets to pretend to stand up to them and then gives them the still high increase that they wanted in the first place. At the end of it, every time, the insurer is allowed to cover less risk but at higher prices. In the case you cited, State Farm was asking for a big increase in rates because they lost money on their investments. Our hurricane risk had not changed since the last increase, if anything the ratings agencies and risk modelers had calmed down after pretending to believe that 2005 would be the new norm. Why should we pay higher premiums or have our deductibles increased or be dropped when the only thing that changed is that the insurer made some bad investments?
But, hey, I believe in capitalism. I would rather not have regulated rates, but I actually understand economics so I know that free markets need choice and transparency in order to work. If there were 6 or 8 insurance companies willing to write new policies then the rates would be determined by the market and there would be no need for rate regulation. Instead we have a failed market where there is no competition on price or quality or service or anything. Homeowners are required to buy insurance by their mortgages but they have no market choice or market pricing and are denied even the opportunithy to buy the policy they really need – one that would cover hurricane damage without forcing them to live in a FEMA trailer for two or three years while they sue their insurer.
Our bill would help capitalism return to the coastal insurance market. By taking on the hurricane risk that insurers do not want, we would free them to return to coastal markets to sell fire, theft, liability, auto, and other property casualty business without being afraid of taking on too much catastrophe risk. Rates for homeowners policies excluding wind would drop because they would respond to market competition. Our bill also would create a new competitive market for coverage above the federal program’s limits. The federal program would offer coverage up to $500,000, so the industry would quickly develop a product for the high-end properties that are the only ones they want to cover anyway. So they could cover the guys with the $1 million, $2 million and up houses, essentially selling a policy with a $500,000 deductible.
We tried for a full year (2006) to find a way to get the private insurance industry to offer a policy that would cover both wind and flood. I met with everyone who was willing to meet with me. We eventually had to accept that they will not do it unless the program is fully backed by the federal government. Look around at the Travelers, Nationwide, Hartford, Allstate, and other plans for a “private” hurricane wind pool. They all want the federal government to be their reinsurer and they want the federal government to preempt state regulation. In other words, they want to be able to charge whatever they want but push the catastrophe risk onto the taxpayers. Our bill is a much better option. Our bill would result in fewer hurricane losses because we could require better building standards, but more hurricane losses would covered by premiums because we would fill in gaps between wind and flood coverage, and taxpayers would save billions of dollars in disaster assistance costs because there would not be so many people needing FEMA trailers and grants and subsidized loans and tax breaks because their insurers did not pay them.