For almost half a century the government-backed National Flood Insurance Program has dominated the flood casualty industry, which has affected no state more than Louisiana. A fifth of all losses have occurred in it, with a third of all payouts made to it.
Still, flooding in north Louisiana almost 18 months ago and around Baton Rouge about a year ago caught out a large number of properties without the insurance, adding billions more in costs to taxpayers on top of the roughly $25 billion debt the program owes. Dealing with that insolvency, which would force state regulators to close any company with that imbalance in the private sector, has become a major part of reform attempts in 2012, 2014, and in proposed legislation addressing the end of the program’s current authorization at the end of September.
The one-size-fits-all approach produces several undesirable side-effects. Research demonstrates that the NFIP prices very inefficiently, with a recent example showing that in Louisiana over two-thirds of households pay higher rates than necessary, with almost half at least 400 percent more. Even in the highest-risk areas, over half would see lower prices with privatization.
The NFIP also distorts housing markets by subsidizing higher-cost properties. As it turns out, rate relief by taxpayers actually goes disproportionately to wealthier households in risky areas as well as encourages more building in those areas. Finally, while Louisiana flooding of last year occurred in non-coastal areas, that runs against type for the typical claim, meaning the NFIP geographically redistributes in favor of coastal areas.
Reforms of the past five years opened the door to private flood insurance, which barely existed since the NFIP used the assurance of taxpayer dollars to underprice the private sector. The 2017 reauthorization provides another chance to inject more market discipline into the industry.
While ideal legislation would sunset the NFIP entirely, it also could allow the private sector to compete more effectively with the government. A balanced approach that encourages proper pricing would entice more people not otherwise now required to have it, such as when they do not have a mortgage, to purchase flood insurance, meaning much less necessity for extra disaster relief payments.
Thus, Louisiana’s congressional delegation should support measures that allow for greater flexibility in coverage, rather than the requirement that private insurers must mirror the NFIP’s policies. Also, those who participate in reselling the NFIP policies should be able to write their own competing policies, instead of having to choose to do one or the other. Additionally, reform should have data collected by the NFIP, which used taxpayer funding to get these, distributed to the private sector to make for the very best pricing model that the NFIP itself eschews in calculating rates.
Finally, the reauthorization should clarify the law to allow lenders to accept products issued by any carrier authorized to sell insurance, including surplus lines. But were the law not to make that change, in combination with allowing an insurer to write polices both for the NFIP and privately, Louisiana should approve of writing those private policies, and perhaps even adopt something like what it did some years ago to encourage migration of homeowner insurance provision from the state’s insurer of last resort to private carriers.
Such reforms receive criticism from those who think these would weaken the NFIP by saddling it with repetitive loss properties (about one percent have gulped up about three-eighths of all payouts) and would weaken its ability to perform other functions such as mapping, mitigating, and regulating. But the costs of market distortion to ratepayers and/or taxpayers outweigh any benefits of propping up the NFIP and legislation could spin off its non-insurance functions.
Policy change always creates winners and losers, but inducing more private flood insurance into the market creates many more of the former and likely a higher proportion of beneficiaries would come from the middle and lower economic classes. Especially as in aggregate savings will accrue to Louisianans more than any place else, its state and federal policy-makers must back plans focused on this.
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