Now that the Homeowner Flood Insurance Affordability Act of 2013 has been passed, you would think there would be a level of agreement on what was accomplished by this legislation. Not so.
Some people say we are going back to the way flood insurance used to be, others say our rates will still go up until they are unaffordable — just a little more slowly.
The one consistent message we hear is that we have “kicked the can down the road,” and the proof is contained in the fact that the National Flood Insurance Program will be reauthorized in 2017. Between now and then, this tug of war will continue.
So, today we challenge ourselves to think outside the box and look for a new paradigm for flood insurance. What if federally-sponsored flood insurance is not the right model for the future?
Before the current flood insurance program was in place, private insurance companies provided “total peril” insurance. In time, these providers carved out high-risk areas in order to reduce their losses, leaving people uninsured and vulnerable to loss. When it came to flood insurance, the federal government then stepped in and created the program we have today. When it came to windstorm, the state of Texas stepped in.
But the original model was a standard one in the insurance industry. Cover the largest number of people by creating one policy to cover tornadoes in Abilene, flash floods in Austin, hailstorms in Dallas and storm surge in Galveston, thereby spreading and balancing the risk.
What if it could be managed at the state level in the future? A part of each premium could go into a reserve fund to cover reinsurance and to pay off losses, and a portion could go to a federal fund. Once the state fund is used, the state could draw on the federal fund. Tied to this would be a limit to the amount of disaster relief available to people who choose not to purchase flood insurance at all.
How could it be re-privatized? Compare to private auto insurance, which works at the state level. The risk is spread across the population by requiring coverage. Varying degrees of coverage are available based on the needs of the individual, the driver’s driving record, the value of the car, the number of miles driven in a year, etc. Premiums can be managed based on the amount of coverage required.
But is there another federal model that might work? One comparator exists in the Federal Deposit Insurance Corporation, a program which operates as an independent agency. This program would not sell policies directly but would help mitigate the risks for private sector insurance companies that do (thanks to “The Three Musketeers” for this idea. See www.sarges.com).
There are no easy answers. But while we as a people are seriously considering health care reform and tax reform, insurance reform needs to be right up there at the top of the list.
Our series of articles is now complete — but your work is not. Thanks for listening!