A Flood of Private Insurance
The National Flood Insurance Program is $25 billion in the red, and because many of its 2012 legislative reforms were rolled back with the passage of recent legislation, there is little hope that the fund will ever be financially solvent. However, a new approach could bring about some relief.
This week, Representatives Dennis Ross and Patrick Murphy, both from Florida, introduced H.R. 4558, the “Flood Insurance Market Parity and Modernization Act.” The bill is designed to give states additional flexibility to regulate and license private flood insurance, and it would loosen the regulations that keep many private flood policies from meeting federal mortgage-lending requirements.
By removing federal restrictions, the legislation would make state laws, such as those recently passed in Florida, Connecticut, and West Virginia, more effective in giving consumers an alternative to the dysfunctional federal flood-insurance program. More choices would create competition in the market, which would invariably produce lower insurance prices for homeowners living in flood-prone areas.
The federal flood-insurance program is financially woeful, as it continues to set rates below actual and prospective costs. These rates produce losses that taxpayers and other consumers must fund, and they encourage building in paths proven most susceptible to storm damage and the loss of life, which only further increases costs for society.
Not only does the current program put taxpayers and some homeowners at risk, but it encourages a cycle of waste. Flood after flood, coastal owners rebuild in the same risky places using the proceeds from the federal subsidized flood program. Government studies, such as one from the General Accountability Office, show that many homeowners pay premiums far below their risk-based costs, and these subsidies often go to the wealthiest homeowers.
In 2012, the Biggert-Waters Act was passed to make the program fiscally responsible, but recent legislative actions have watered down these reforms. Today, a consumer who owns a home a few blocks from shore, outside of the most exposed flood zone, could be paying substantially more in flood premiums in order to support consumers who choose to live directly on the coast -- effectively a beach-house bailout.
H.R. 4558 allows private industry to provide flood insurance in competition against the federal program. The idea of returning government services back to private industry is not a new one. In the 1970s, economist Thomas Borcherding observed that government provision of private goods increases costs by two-fold. Some years later, his observation of a “Bureaucratic Rule of Two” was tested by James T. Bennett and Manuel H. Johnson, who collected empirical evidence from nearly a dozen industries and found that government provision of private goods comes at twice the cost.
If the current federal program decides to overcharge some consumers to benefit beach house millionaires, H.R. 4558 will encourage the private market to undercut these prices and provide consumers more choices and lower prices.
Though it will be difficult for the federal insurance program to lose its most profitable customers, the move could save taxpayers money in the long run. For one, insurers have a surplus of capital, which means that there is plenty of claims-paying capacity at favorable rates. In addition, private-sector competition will put pressure on the Congress to align the federal government's rates closer to risk, possibly by reconsidering the reforms it foolishly rolled back. Private funding, in combination with more fiscally responsible pricing on the part of the federal program, will shrink the federal fund and its annual losses. Finally, getting prices closer to risk will discourage fiscally irresponsible coastal development, thereby putting property and lives out of harm's way. All of these factors could contribute to a substantial savings.
In short, this is a welcome piece of legislation introduced by two Floridians who understand the potential devastation that catastrophic storms can bring. Their legislation, if enacted, would encourage the private sector to assume flood risks, instead of putting taxpayers in that unfortunate position.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.