The Mielke Way: One More Can Kicked Down the Road
Congress delayed decisions on two important issues last week as they tied raising the debt ceiling and passing a budget for next year with funding for Hurricane Harvey and Irma. To the dismay of the Republicans, President Trump reached across the aisle to make the deal with the Democrats. The legislation packaged $15.25 billion in hurricane aid with a continuing resolution to continue the budget as is and lifting the debt ceiling until December 8. However, there was another delay that was overlooked by the media that also has important consequences–extending the federal flood insurance program as is until December 8. The current legislation to provide government flood insurance was due to expire September 30. What is the National Flood Insurance Program? The government flood insurance program is massively subsidized by taxpayers. Should that subsidy be continued? Does the cheap insurance encourage more building in flood zones? Does the insurance really provide the coverage needed for those hit by flooding? Should the insurance program be renewed, revised or left to die? What is the “Right Thing to do?” Let’s look at some issues:
- The National Flood Insurance Program was created about 50 years ago because private insurers were unwilling to risk catastrophic flood losses. The program is managed by the Federal Emergency Management Agency or FEMA. The program has roughly 5 million policyholders with a total of $1.24 trillion in coverage.
- The federal program was primarily designed for homeowners and has had few updates since the 1970s. Standard protections for small businesses, including costs of business interruption and significant disaster preparation aren’t covered and maximum payouts haven’t risen since 1994.
- Until 2004, the federal flood program collected enough in premiums to cover most claims. It fell deeply into debt following Hurricane Katrina, when it paid out $16.3 billion. It added to its losses after Hurricane Ike in 2008, Super Storm Sandy and currently owes the US Treasury $24.6 billion.
- The federal government hasn’t yet calculated the potential financial impact on the flood insurance program of Harvey and Irma. The flood program has roughly 440,000 flood policies in potentially affected counties in Texas and more than 490,000 in Louisiana alone, not counting those in Florida and other states. The policies payout a maximum $250,000 for rebuilding and $100,000 for personal possessions.
- Conventional homeowner policies provide payouts for damage from wind, fire, fallen trees and other storm related events, but not flooding. Corelogic has estimated that total residential flood costs of $25 to $37 billion in 70 counties in Texas and Louisiana hit by Harvey. Of that, about 70%, or $18-$27 billion, is uninsured. The amount of uninsured will jump because of Irma.
- Government flood insurance is massively subsidized. The premiums are well below what the private insurance market would charge–and private insures have withdrawn from the market. When the Congress passed a law in 2012 requiring homeowners to pay the full cost of their insurance, the citizens screamed bloody murder. It was so bad that Congress reversed itself in 2014 and toned down the law.
- Roughly a dozen Senators were proposing legislation that would adjust homeowners’ rates to be more in line with a property’s risk and create incentives for private insurers to take on more policies. That proposal is unlikely to move forward now that the flood insurance program has been extended until December 8.
- Some argue that by providing cheap flood insurance, we are making it more attractive to build in flood zones. As a result, more construction has occurred in flood zone areas, increasing the risk, potential damage and costs to the government.
- The program has about $1.24 trillion in total risk from floods, about 5 million homes at around $500,000 each. The premiums being charged total $3.5 billion a year.
- Studies suggest up to a third of homeowners who are required to take out flood insurance policies have not and they estimate that millions more who should have flood insurance but aren’t required to.
- Even though the federal government sets the premiums and takes the risk, private insurance companies get to sell the policies. These companies are entitled to collect up to 29% of the annual premiums. The 29% goes to an agent’s commission, company overhead and profits.
The massive toll due to the recent hurricanes will place pressure on Congress to renew the federal flood insurance program. Now that Congress has delayed action on the National Flood Insurance Program until December 8, will they begin to work on reforms? Should premiums be raised? Should the federal government bail out the existing plan’s debt of almost $25 billion—sure to increase substantially because of the recent hurricanes? Are the below market costs of insurance providing incentives to build in flood zones, thereby making the situation worse? Should the flood insurance program be renewed? What is the “Right Thing to do?” There is no question that taxpayer subsidies to lower the cost of flood insurance has provided an incentive to build in flood zones. Congress should renew the program, but gradually increase rates over a period of years to better reflect the risks of flooding. They should determine a process to involve private insurance companies to take on the risk and slowly exit the market. They should place a moratorium on selling any new policies until the transition occurs. Unfortunately, Congress and we the taxpayers will have to bail out the program to eliminate the $25 billion plus debt. Hopefully, as a result of increasing premiums and slowly exiting the market future subsidies will be limited or unnecessary. Will members of Congress take on the difficult job of reform, or will they merely pay off the debt and continue as usual by kicking the can down the road once again?