Federal, state insurers need to stop subsidizing riskiness

The fate of the continuing operation of the National Flood Insurance Program should be of more than passing concern to Louisianans, being that no state has benefitted more from its existence or has done the most to put it in the red and prompt its reform. And it also provides lessons for the state’s own policy of acting as property insurer.

Since 2008, the federal government-run program established four decades prior has operated by a series of short-term authorizations under existing rules that continue to drain federal taxpayers to subsidize those wishing to own property in riskier areas. Its rates set below real levels needed to offset actual risk have meant in few years have premiums at least matched losses paid, building up a steady deficit that has caused it soon to hit its $20.8 billion borrowing limit, and with no real pressures to conform to market rates having driven all private insurers of flood risk out early in the program’s history.

Actually, not a lot of the present borrowing authority had been used until 2005, when Louisiana broke the bank and then-limit of $1.5 billion with its hurricane disasters. Although one of the highest users of the program, ranking third in absolute numbers behind only the much larger in area and population Florida and Texas in policies written, the value of them, and their premiums paid amount, historically the state has sucked out resources from the program far out of proportion to its population. With about 1.5 percent of the nation’s people, since its inception the state has been the source of over a fifth of all losses historically and a staggering two-fifths of all claims monies paid out – enough of the latter to account for almost all of the money borrowed in the program’s history to date.

The House passed legislation in 2011 that the Senate has done nothing but did come up with a similar version it has tried to deal with this year. Both try to institute reforms that would allow the Federal Emergency Management Agency to increase premiums, by a maximum 15 percent a year in the Senate version, up from 10 percent; phase out subsidies for high-risk properties; and require that new policies are based on actuarially sound rates. The Senate’s version also could incorporate the latest continuing resolution’s change of stripping the insurance’s use on vacation and second homes.

Yet even if passed before the Jul. 31 expiration date of the latest extension, the anticipated rise in premium rates would contribute only $4.6 billion more over the next decade, not nearly enough to pay down debt, which may have to go even higher than its current limit. While the bill does make the right choice in introducing more market reforms, its ultimate intention must be to get government entirely out of the business. That will be hampered with the debt overhang.

Louisiana has a related situation with its state-run, troubled Citizens Property Insurance Company, where it insures homes, including for wind and hail protection but not flood, at the highest of market rates in some parishes and at least 10 percent higher in others. It dealt with the 2005 hurricane disasters’ claims by the same borrowing strategy, but hitting up all state policy-holders to pay down the debt.

The NFIP should adopt something similar to cover its debt, except limit the extra assessment to that one percent of properties nationwide required to have flood insurance. Naturally, this will hit some Louisiana homeowners hard, but it’s the least they can do for living off the subsidies of others for their choices in housing. The extra assessment can be discontinued when premium rates have come up to actuarially realistic rates.

Louisiana has experienced the most benefits transferred by the present process, so the change will impact it the most concerning costs. But just as the NFIP may learn from the assessment tactic, so should the state with Citizens learn from the privatization goal that should be implicit in the NFIP reforms. If the federal government can force NFIP to bear the market on its way to dismantling, the state should expect the same with Citizens. The goal should be not just to reduce participation in Citizens, but to end it as well.