Insurance News

Beyond Big Easy, a ‘faith-based’ approach on flood insurance

Posted on: September 4, 2010

Away from New Orleans, with its unique geography and dependence on levees, discussion of hurricanes inevitably turns to insurance. After Katrina struck in 2005, there was much talk about reforming insurance programs in coastal areas to protect taxpayers and promote responsible development.

By and large, much of this talk has remained just that. Several states — among them Mississippi, Louisiana and both Carolinas — have made important strides in promoting sensible insurance and building-code policies. But others have not, or have even gone in the wrong direction. Washington’s role in insuring coastal properties, meanwhile, remains its own disaster area.

The National Flood Insurance Program is a near-perfect illustration of what’s wrong in Washington and why. In a cover story Thursday, USA TODAY’s Thomas Frank exposed a new round of absurdities.

The program’s premiums are based on what coastal-state lawmakers think they should be, rather than what is needed to fund payouts after major storms. The program is now $19 billion in the hole as the result of Katrina and other storms. The Federal Emergency Management Agency, which runs it, has no plans for doing anything but passing this red ink, and future losses, on to taxpayers.

National flood insurance is not only a drain on the federal treasury, it also encourages overbuilding in flood-prone areas, which begets even more losses. Frank found 19,600 properties where repeated claims have resulted in payouts greater than the property’s value. In one case, a Mississippi home valued at $69,000 has been flooded 34 times since 1978, prompting insurance payments totaling $663,000.

One option to fix this ludicrous situation is to phase out the federal program and turn it over to private insurance companies. Doing so would not only protect taxpayers, it also would end the nonsensical fight after every hurricane over whether a structure was destroyed by wind (and therefore covered by private insurance) or water (covered by federal insurance). A second option would be to change the program so it could charge premiums that roughly approximate actual risk from storm-related losses.

Don’t count on either, however. Efforts at reform are stalled in Washington, as coastal-state lawmakers are pushing for new ways to pick the pockets of people who don’t live in hurricane-prone areas.

Irresponsibility extends to the state level, where Florida has decided that a government takeover of the homeowners insurance business was in order. When rates went up after the 2005 hurricanes, Gov. Charlie Crist signed legislation turning the state-run Citizens Property Insurance Corp. from an insurer of last resort to Florida’s biggest property insurer. Meanwhile, the state’s Hurricane Catastrophe Fund, the main re-insurance pool used by public and private insurers, has nowhere near the reserves needed to survive a major storm.

Florida’s plan has been called a “faith-based” way to deal with storms. It might also be called a Washington-based plan, on the assumption that a bad hurricane year would send state officials scurrying to Capitol Hill and the White House in search of a bailout.

As yet another hurricane season approaches its peak, coastal residents aren’t the only ones threatened. Florida’s finger-crossing and the ongoing National Flood Insurance fiasco put taxpayers everywhere at risk, too.

Copyright 2010 USA TODAY, a division of Gannett Co. Inc.

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