Plagued by frequent stopgap funding requests for the National Flood
Insurance Program, last year Congress passed legislation designed to put
the program on consistent footing for the next few years, as part of a larger
bill which passed along billions of dollars to Louisiana related to the 2010
drilling rig explosion in the Gulf of Mexico that caused the state environmental
problems. All homeowners in a flood zone must purchase it while others may do
so optionally from the program established by the federal government 45 years ago
in lieu of private insurers. The idea was to set a uniform rate nationwide covering
a broad-based clientele to prevent wide variations in premiums, including
prohibitively expensive ones.
But it also was supposed to be self-supporting, even though by statute
this was not achieved in the initial pricing and has only crept towards that
ever since. Last year’s legislation was supposed to achieve that by inducing
rate hikes based somewhat on risk as high as 20 percent per year over several
years. Louisiana’s
congressional delegation unanimously approved of it even as a few
reservations were voiced, most often from Sen. Mary Landrieu and from
Sen. David Vitter
through his competing legislation and negotiations to limit increases and
to spread them out over more time and to make it easier to demonstrate greater
protection from flooding.
Now, reality is starting to hit home as Louisiana residents, in the program
in disproportionate numbers who historically have received more in payouts than
have paid in premiums, experience the escalating rates. Some have put pressure
on federal elected officials to find relief, some of whom are calling for and wanting
to file legislation to accomplish slowing the increases while saying they felt
compelled to vote for the original legislation in order to bring stability to
the program and to snag the coastal recovery money – even though, as it turned
out, the bill passed overwhelmingly so nay votes would have allowed them the benefit
of symbolic opposition with the substantive concrete reforms.
At least one state official – where the state bears no connection to
the program at all – opined that there shouldn’t be a need for increases at
all. Using publicly-available data, Louisiana Governor’s Executive Assistant
for Coastal Activities Garret
Graves argued
that, in adjusted 2012 dollars, the program had taken in from 1978-2012 $65.3
billion and paid out $56.4 billion, implying a net surplus was available.
However, this analysis overlooks several aspects. First, a constant
dollar comparison can be misleading because while premium
dollars can be hoarded and invested, dollars paid in claims
go out at a discrete point in time. A premium dollar collected one year can sit
and compound over years, but claim dollars cannot. Were flows in and out
roughly equivalent and invariant over time, the comparison with unchained
dollars – which show over this period premium exceeding $49 billion and claims
of $43 billion – would be pretty close, but if they are not, and especially
when you have more claims than premiums early on, this can distort the calculation
to overweigh the amount of premiums. And in the 1978-83 period there were
surplus claims.
Still, even if Graves’ calculations come up 50 percent higher than the
actual numbers, a surplus did exist. However, this also does not factor in the 1968-77
data, which are not publicly available and also may have led to borrowing because
no backstop funding existed from the start if claims exceeded premiums nor has
reinsurance been purchased then or now. Thus, a debt overhang was created.
This points to the real problem,
which is forced borrowing occurs when catastrophic losses factor in, for as
the payments in median years match claims, claims spike highly in outlier years
forcing more borrowing, which must be paid back at interest (and at a rate
higher than the discount rate employed by Graves in his analysis, which was the
Consumer Price Index). This is debt, now over
$30 billion including principle and interest, and is not included in Graves’
analysis.
Nor does he include the 2013 claims figures and premium figures, which
at halfway through the year would appear to add at least $3 billion in deficit
spending (because of Hurricane Sandy devastation in the latter part of last
year). Nor included are programmatic costs, which come out of premiums and have
been an
object of criticism by the federal Government Accounting Office. Even if operations
could be performed more efficiently, as the GAO concluded, the fact is they
have contributed to a debt that must be paid off, and that it makes more sense
that policy-holders bear a greater burden of this than they have in the past.
Unfortunately, this especially is true of Louisiana. Only Mississippi
is even close in per capita claims
coverage history (through 2010; New York and New Jersey may have gotten somewhat
closer as a result of 2012), where Louisiana’s have exceeded $2,000 (the
national median was less than $125). In fact, Louisianans through the first
half of this year have been paid a third of all claims
dollars in the past 35 years. Assuming premiums (which will overstate
considerably the actual amount paid because of inflation and infrequent rate
changes upwards) across those 35 years are the same as the most recent year’s, the
sum of them shows Louisiana still “owes” $4 billion over that time span.
The concept of insurance, of course, is that spreading out risk means,
netting out premiums and claims, some will pay more and some will pay less as a
matter of chance. Yet it also assumes that premiums paid bear some relationship
to factors that aren’t chance and it should be clear that some, and
disproportionately so in Louisiana, have gotten subsidized in their choices
about where to live – much less factoring in all of the externalities borne by
others still, such as the subsidization encouraging building in vulnerable
ecosystems that cause environmental degradation that may affect a vastly
broader population.
The proper course would be not to mend, but to end eventually, the
entire program. Taxpayers already have subsidized the program in essence
through the debt that may never get paid off, and the previous paradigm before program
introduction was that special disaster relief bills would take care of
catastrophes. That still continues, on top of the NFIP, rather than being
replaced by it, so taxpayers still shift money to subsidize certain choices.
However, that option seems politically impossible. Therefore, the rate
increases are appropriate from a national perspective, and while there can be
debate over their timing, they should continue until the present subsidization
has become much reduced and results in a structure that has a realistic chance
of making the program paid up and self-sustainable over the next couple of
decades. Some subsidization from one ratepayer to another can be desirable as
the activities that occur in the high-risk areas carry economic benefits nationally,
but not at the level it has operated.
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