Letter from Washington: Why we should mend, not end, federal flood insurance

mending bag phase 1

As the staff of the Heartland Institute’s Center on Finance, Insurance and Real Estate transitions to R Street, Out of the Storm News is going to be transitioning as well. Over the next few months, many of the features you see here will be transferred to  R Street’s soon-to-launch Word on the Street blog, which will be hosted at our main RStreet.org website. For the time being, R Street will be keeping the URL for Out of the Storm News. Over time, however, we’ll be merging much of OOTS into Word on the Street. The transition will be gradual and, obviously, we’ll keep all of our readers posted.

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At this point, it appears almost inevitable that the National Flood Insurance Program is going to have at least one more short-term extension—probably until June 30—before Congress is able to pass a long-term reauthorization. I strongly support reauthorization, as do both R Street and, insofar as I can still speak for it, Heartland. A few of my conservative friends have raised questions about the program, the way it works, why conservatives should support reauthorization in the first place, and what good any reauthorization would do. These are legitimate questions and I’d like to answer them. Basically, there are at least three reasons why conservatives and others who want to see the program either eliminated or significantly reduced in scope should support reauthorization now.

Ending the program is more expensive to taxpayers than keeping it in place: If the program ended, the federal government would still have to produce flood maps, pay interest on NFIP debt, and pay claims on policies that hadn’t yet lapsed. Relief costs also might rise.  Not counting these presumably higher relief costs, the Congressional Budget Office has estimated that the program’s termination would cost $2 billion the first year and, as a realistic matter, every year thereafter. The current NFIP (measured by the amount of debt it has accumulated) costs about $450 million a year.

The private sector hasn’t stepped forward and probably wouldn’t: In the main, there’s no evidence that private companies will write flood insurance in the short term. I know this for a fact. I tried to find someone who would step forward to say, “we’ll help privatize” and nobody would. Not one company. Not without reason, private insurers are very skittish about writing flood cover even if they write it in other countries. American states can use their rate regulatory power to try to force them to write flood insurance below cost. This could be a disaster. Given that homeowners insurance, in the best of times, is only marginally profitable–that’s why mutual companies, often focused and incented based on market share growth rather than profits, per se, write most of it—nobody is going to be anxious to enter the market. The case for, say, privatizing Medicare right away (which I wouldn’t support), actually is a lot stronger than the case for getting rid of flood insurance: America currently has scores of private health insurers, but no private flood insurance for most properties.

The reauthorization makes privatization possible: The reauthorization does not privatize NFIP and does not require it to become private. That’s still a battle for later. But it does raise most rates to actuarially adequate levels where the private sector could (and may) start writing policies. It also gives the program’s administrators the option to purchase private reinsurance. If both of these measures—risk based rates and private reinsurance—became a reality, then the need for the program will begin to wither away. Half a decade hence, indeed, it may be possible to generate enough private market interest to make privatization a realistic and cost effective policy course.

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About three months ago, thinking about my future career, I bought a book about how to become a non-profit CEO. It was a long-term career goal of mine, something I thought might happen in a few years. For a variety of reasons, however, things have sped up and now it appears that I’m going to become a non-profit CEO very quickly—next week, in fact.  R Street is ready: we are incorporated, have a bank (actually, a credit union) account, a staff of six and we’ll have a web page launched by June 1. By think tank startup standards, R Street is pretty big. By D.C. think tank standards, of course, it’s still tiny. But it’s real. And it’s moving forward.

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