Today higher, in some cases much
higher, premiums go into effect for flood insurance across the country, but
disproportionately so in Louisiana. Last week, state Treas. John
Kennedy said he wanted to start
a conversation about what the state could do to lower these rates. And when
we do it, it turns out to be a lot of hot air.
Kennedy’s suggested that the
state create its own, basic flood insurance program with the federal program as
a catastrophic backstop that might allow combined rates overall to come down.
He figured this possible as state authorities could factor in to pricing
elements such as locally-built levees not considered by the Federal Emergency
Management Agency in its determination of flood risk used by the National Flood
Insurance Program. He said a similar state insurer, Louisiana Citizens Property Insurance
Corporation, might serve as a model.
Whether that would produce an
outcome of lower aggregate pricing is anybody’s guess, but Insurance
Commissioner Jim Donelon
sees certainly it would increase the administrative complexity. He also noted
this is not something the state unilaterally could do in any event, for changes
to federal law would have to be made to alter its nature to accommodate.
Further, Senate Insurance
Committee Chairman Blade Morrish correctly
notes the unlikelihood that
any state involvement could lower prices without increasing its taxpayer risk,
echoing industry professionals and analysts who point out that having state
insurance involves a smaller policyholder base, which increasing volatility to
the upside in costs. In other words, the only way to get lower rates in
aggregate would be to create some kind of state subsidization in all likelihood
because of the relatively riskier pool created.
Part of the problem comes because
flooding by its nature is catastrophic. General storm damage, for example,
could be anywhere from none to a total loss; houses next to each other may have
one wiped out with the other undamaged. But with flooding, as soon as even a
trace of water enters a house, substantial damage occurs, mainly flooring and
carpeting. Add a couple of inches more, and it’s multiplied considerably,
affecting contents, drywall, insulation, doors, and probably the electrical
system. Beyond that, it takes a few feet more for anything more substantial,
such as structural integrity, to be threatened. And unless elevations vary
wildly among neighboring houses, all are affected equally. That is, unlike most
property damage that can work on gradations, with floods they operate more like
a tipping point from no to substantial damage.
This quality jacks up risk of
damage and therefore the necessity of having a large reserve ready to go at any
given time; therefore, the higher premiums go to fulfill that. And the fewer
households involved, the higher each pays because the lower-risk end is
underrepresented. This is why it is less costly to the citizenry to have a
Citizens kind of general insurer than it would to have, in a proportional
sense, a flood line to it as well.
So, Kennedy’s notion falls flat. The
best outcome would be for the federal government
to exit the insurance business completely (which Morrish recommends as
well) in favor of episodic catastrophic relief, but is entirely unlikely to
happen any time soon with implementation the recent NFIP reforms designed to produce
more accurate pricing, albeit forcing premiums much higher for a very small
segment of ratepayers.
Given that, at the aggregate level
the state can continue its existing plan of trying to lower rates for many by
implementing its coastal protection strategy designed to arrest subsidence and
erosion and to build ring levees where needed (provided it can blunt
interference from a rogue
local agency wishing to impose its own policy ahead of the state’s). The
only new thing the state could do at the individual level would be to provide
grants for elevation purposes, expanding the Road
Home effort, but this also could turn out to be impractically expensive.
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