By JON CAMPISI, who has been a writer and editor for a number of media outlets in the Philadelphia area.
With all the uproar over the Obama administration's healthcare law, it's easy to forget that the government is already in the insurance business.
Flood insurance, to be exact.
Late last month, President Obama reauthorized the National Flood Insurance Program, the 12th time it's been re-authorized since 2002, according to various news reports. The government-run program, which has been insuring flood-prone area residents since 1968, is generally viewed as a benefit to those whose homes exist in low-lying, water-abutting areas. But those in mountainous states like Colorado or California typically don't like the insurance because they pay much more in premiums than they collect in claims reimbursements.
The president's signature on the appropriations bill means the NFIP will be extended through May 31.
But with today's partisan political climate, where there's a push for less government intrusion and more privatization, the future of the government-run flood insurance program will always be in doubt.
"If the government simply stepped out of it completely, and it was not renewed at all, I would think there would have to be some coordination with the private market," Robert Muir-Wood, chief risk officer at Risk Management Solutions, Inc., said in a phone interview from his London office.
The problem, Muir-Wood said, is if the National Flood Insurance Program were scrapped, and private industry took over flood insurance, rates would likely increase three or fourfold. Why? For one thing private insurers have traditionally been leery of insuring potential flood risks.
The reason for that is simple: unlike earthquakes and other natural disasters, it's easier to predict where and when flooding will occur.
"It's a general problem around the world," Muir-Wood said. "If you have someone in a higher flood risk location, the true cost of insurance is pretty high."
Muir-Wood said private industry offered flood insurance cover in the early 20th century. But insurers exited the flood insurance game in 1927 after a large flood along the Mississippi.
"They [insurers] eventually got scared," Muir-Wood said.
Private insurers steer clear of flood insurance because they don't think they would be able to charge clients for the true risk, said Muir-Wood, and doubly worry that they would be paying more out in claims than they would take in in premiums.
The concern is nothing new, and is backed by statistics.
A recently released study by the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, found that 2011 was the costliest year for natural disasters worldwide, with insurance claims toppling $350 billion.
In the U.S. alone, there were nearly 100 Presidential disaster declarations, two-thirds of which came from hurricanes and floods, the study reported.
Wharton says the National Flood Insurance Program is now $17.8 billion in debt due primarily to historic levels of flood claims tied to the 2005 and 2008 hurricane seasons. The former was the year of Hurricane Katrina.
The study analyzed the role the private insurance industry could play in flood insurance, and, unlike previous assessments, suggests that the situation isn't as dire as it has been painted to be in the past.
"The NFIP has brought important benefits to those living in hazard-prone areas over the years," a news release announcing the study states.
While Wharton acknowledges the importance of the government program, it also says private industry should consider supplementing what the government is offering.
One thing that could pave the way toward private flood insurance would be NFIP reforms, like requiring new construction in flood-prone areas to be elevated.
The study also shows the disparity in insurance premiums between different regions of the country, with some areas paying too much in flood insurance, and others paying too little. In Louisiana, for example, policyholders paid $4.4 billion in premiums but collected $16.7 billion in claims between 1978 and 2008. Compare that to California, which paid $3.5 billion in premiums but collected only $710 million in claims.
"There is a growing consensus that the NFIP needs reforms," the Wharton news release states.
One reform would be to revamp the outdated floodplain maps, something the Army Corps of Engineers and the Federal Emergency Management Agency have been working on for years.
"This presents opportunities for private insurers to provide coverage in some of those areas, to complement the NFIP," the study's co-author and managing director of the Risk Center, Erwann Michel-Kerjan, said in a statement. "There are several practical barriers that would need to be addressed for private insurers to sell such coverage, but if done, this could significantly increase the number of residents with proper coverage, thus reducing the need for government disaster relief."
Today, the NFIP covers more than five million households, insuring $1.25 trillion worth of property.
As for the politics of it all, Muir-Wood said that regardless of party lines, elected officials have constituents to please -- and that means appeasing those in flood-prone areas. People in coastal areas, for example, might not be too happy with their lawmakers if they favored privatization, which could mean tripled rates for flood insurance.
"They would be subject to a lot of aggravation from their constituents," Muir-Wood said.
For now, it's anyone's guess what will become of the NFIP once the latest extension expires this spring.
But if history proves anything, a 16th extension in 10 years doesn't appear that far-fetched.
January 24, 2012
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