Can We At Least Get Rid Of Federal Flood Insurance?

One of the main places where I differ with the Manhattan Conventional Ignorance is on the concept that the Federal government has the ability (and therefore the obligation) to take all the downside risk out of life by acting as the infinite insurer of all major risks.  Most people know that the Federal government provides insurance against old age in the form of annuities for all (Social Security), and against medical expenses in old age (Medicare), and for the poor (Medicaid).  Fewer know about other massive government  interventions into the world of insurance, including insuring nearly all home mortgages (Fannie, Freddie, FHA), all private pensions (PBGC), risks from terrorism (TRIA), risks of loss of crops, and on and on.   How do intelligent people convince themselves that it is possible for this level of risk-bearing to persist for a long period without creating its own disaster?

Out of them all, my pet peeve is the National Flood Insurance Program (NFIP), the one that pays when your house on the barrier island gets washed away in a hurricane.  The program was originally created in the 1960s, when the idea of the government as infinite insurer of everything was just taking hold.  The program was supposed to be self-sustaining, but of course that's not how the government works.  In the 90s, when I owned a house on the barrier island, I got into an argument with the president of the Fire Island Association, with him claiming that the program always had and always would make money off the ocean-area people, and me saying that it was just a matter of time until the Big One put the program tens of billions of dollars "under water."  Guess who was right.

The original "Big One" was Katrina in 2005.  The NFIP promptly ran out of money and "had" to be bailed out, to the tune of $20 billion of borrowing authority from the Treasury.  They promptly blew through $18 billion of that.  Then came Sandy, and they just got another $7 billion a few weeks ago.  And so it goes.

But could it be?  An article in the current issue of Business Insurance says that proposals are circulating in Congress to privatize the flood insurance business.  The Chairman of the House Financial Services Committee, Jeb Hensarling (R, TX) actually seems to be hostile to this thing, and is quoted as calling it "ineffective, inefficient and indisputably costly to hard-working American taxpayers."  But of course, there is no mention of anyone in the Democrat-controlled Senate taking any kind of a skeptical look.  And for every industry player quoted in the article as thinking that privatization would be a good idea, another is quoted pointing out problems and risks.  My favorite is this quote from Nathaniel Wienecke, an executive of the Property Casualty Insurers Association of America:  "[T]he cost would be significantly higher because the industry would have to charge rates that were actuarially sound."  Imagine that!

Back in my Fire Island days, I did some back-of-the-envelope calculations of what kind of rates it would take to make a real business out of barrier-island flood insurance.  Based on a hurricane taking out a town or two every 30 - 50 years I figured that rates would need to be about 2 - 3 times the then-current Federal rates, except for the ocean front houses.  For the ocean front houses, the rates would need to be at least 10 times the Federal rates.  Why?  Because the ocean front houses are greatly at risk not just from major tropical storms and hurricanes, but also from run-of-the-mill nor'easters that come around most every year.  During the eight years we owned a house on Fire Island, there was no major tropical storm or hurricane, but about a third of the ocean front houses (and no non-ocean-front houses) were taken by the ocean.

Oh, I hadn't mentioned that the NFIP saves its hugest subsidies for the richest of the rich, the ocean front homeowners?  I hope you are not surprised.

Current status is that the program has no reserves at all and is about $27 billion in the hole to the Treasury from Katrina and Sandy, with no real prospect of ever paying that back.  Meanwhile, Katrina mostly missed the most valuable parts of New Orleans (Downtown, French Quarter, Garden District), and Sandy was a bare minimum category 1 hurricane.  The next one could be far, far worse.  Next time you are in South Florida, check out the build-up on the barrier islands from about Palm Beach to Miami.  A good category 5 strike right there could easily be a $100 billion event, maybe $200 billion.  Not a dollar of that is included in any debt or deficit projections you will see.

The biggest problem with privatizing the flood insurance program, or even increasing the rates, is that lots more people would then just go uninsured and figure that when the hurricane comes they can buffalo the government into paying them off in a "disaster relief" bill.  My solution is that the government should go around to every corner within the coastal flood zones and put up signs in huge print saying:  THIS AREA NOT ELIGIBLE FOR FEDERAL DISASTER RELIEF IN THE EVENT OF OCEAN FLOODING.  Of course, that kind of plan doesn't offer good prospects for vote-buying for the likes of Schumer.  So for now, I'm not holding out much hope.