Arguments for and Against NFIP's Radical Solution

NFIP's unexplainable $18 billion debt was discussed in the first of this three-part series. The previous article introduced a radical plan (radical meaning that "it hasn't been done that way before") to fix the current flood scheme. And this, the final part, completes the discussion of the proposed program by introducing some of the arguments against the proposed program and listing the benefits of this plan.

Each objection will be explored in the following paragraphs; and the post will conclude with a look at the benefits of this solution and other programs like it.

Arguments Against This Program

There are some reasonable arguments against the implementation of a program such as this. The following paragraphs will look at a few.

"I don't need flood insurance and I don't want to subsidize those that do." In response to the statement that flood insurance is not "needed" see the article "Flood Damage Not Limited to 'Flood Zones'." Nearly one-third of all flood losses occur outside of what are incorrectly referred to as "flood zones;" this according to the NFIP itself. Even in non-special flood hazard areas, property owners are still subject to flash floods, run-off and other potential floods. Just because it hasn't happened in the past does not mean it won't in the future. An annual premium of $40 is a good price for this protection; the only difference here is that the insured sees exactly what is being paid for one particular coverage rather than having the premium hidden in the package cost. If each coverage were broken out and a premium assigned to each, the insured might choose to go without some of the coverage they currently take willingly because they don't know the cost of that particular coverage.

A "subsidy" is a grant or other payment made by the government to individuals or communities. The money for such grant comes from the tax payer. However, a subsidy gives nothing back to the individuals paying the money - there is no equitable exchange. This is not a subsidy as the insured is gaining a promise to pay in the event of a loss - classic definition of insurance. There is an equitable exchange of something for something. Just like coverage for loss by fire; you may never have such a loss (but you might) but you still pay a premium to protect you from such damage. Your premiums are pooled with all the other insureds' premium to pay losses that do occur. Yes, a lot of folks consider themselves ill used if they pay premium all their lives and never have a loss, but that is how insurance works - you bill the many to pay the few.

Additionally, tax payers already subsidize those that don't buy flood insurance. After a major loss, disaster assistance payments are made; $110 billion was paid for hurricanes Katrina, Rita and Wilma. The citizenry pays already when there is no flood insurance. This plan will give coverage and reduce the need for true subsidies.

"If everyone is insured, the amount of flood losses will increase." That is absolutely true. As presented earlier, the Congressional Research Service reported in 2006 that average flood losses have increased to $6 billion. That amount does not represent NFIP-insured flood losses, those are all flood losses. The NFIP experienced average annual losses between 1990 and 2007 of only $1.7 billion (this includes all $17.6 billion in 2005). The $12 billion will be ample to cover all flood losses and to develop reserves for the future (at some point possibly allowing a drastic cut in the premium).

Think about annual flood losses in relation to the idea of "subsidies" as mentioned above. If average annual flood losses top out at $6 billion but average annual NFIP payments are only $1.7 billion; from whom does the annual $4.3 billion difference come? The taxpayer is subsidizing those that didn't purchase flood insurance. That's just over $31 per year, every year for each of the approximately 138 million taxpayers (per IRS numbers of taxpayers) for which they get nothing.

"Properties located in CBRS (Cobra Zones) and OPA's are not eligible for coverage; what about those property owners?" Based on the goal of those laws, it is unlikely the Federal government will want to offer coverage under any plan to property owners in these zones. However, the law states that no Federal money is to be used in these areas, if this plan is instituted, this is no longer federal money; loss payment is made from premiums paid by property owners. It is possible that such a plan would negate the effects of the current CoBRA laws.

"To be eligible for flood coverage, the property owner has to live in a participating community." While there are over 20,000 participating communities, there are still many places that are not part of the program. Qualify as a participating community can be a long process (click here to link to "Flood Coverage Forms in Participating Communities"); whether this requirement will or should be waived is an unanswered question. As above, this is a federal requirement and if the Federal government is moved to a subsidiary role, this may become less of an issue and open all communities up to coverage. Properties in these locations could be assigned to the "non-compliance" classification discussed in the rating section (need to add a premium for "non-compliant in non-SFHA).

These are a few of the questions that this type of radical plan may raise.

Benefits of the Plan

A few of the benefits of such a plan have been presented in the previous paragraphs and may be repeated here.
• Everyone is covered by flood insurance through the private markets as opposed through the government;
• Insureds deal with one company, one adjuster, pays one deductible only and is paid much more quickly;
• Any debate or argument over wind vs. water is between the insurance carrier and the NFIP;
• Premiums are much lower but are more than adequate to cover flood losses. Flood coverage can finally benefit from the Law of Large Numbers rather than the curse of Adverse Selection;
• Insureds can more easily afford excess flood coverage;
• A loss reserve can be set up for anomaly years;
• NFIP administrative costs should go way down;
• Disaster relief subsidies should be greatly reduced; and
• The insured no longer has a gap in coverage for indirect losses. Currently there is no coverage under the flood policy for additional living expenses, loss of rents or business income coverage. If coverage for these indirect losses is part of the package then there is coverage for these indirect costs caused by flood (which is now a covered cause of loss).

Alternatives to NFIP

This is only one alternative that may be available to replace the current flood insurance scheme. But whatever is done it is clear that the current system is broken and some workable alternative must be found and implemented soon.

Once the new congress is seated in January, this and other radical ideas may not seem so radical. What type of plan do you think will work? Let's fix this as an insurance community rather than give it to the government to continue down the wrong path.

NFIP Problems and Alternatives Series Series

1. Fixing the NFIP - The Most Inefficient Insurer in the World
2. National Flood Insurance Program's Radical Alternative
3. Arguments for and Against NFIP's Radical Solution

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