Each time it has been trotted out on the public stage, the Beach House Bailout has died an ignominious death. Leave it to the necromancers on the Tampa Bay Times  editorial board to try to raise this zombie idea from the grave.
In a recent editorial, the Times  correctly highlights the perverse incentives and political dysfunction that surround the 50-year-old National Flood Insurance Program. Unfortunately, the Times‘ proposed solution is to replicate those same perverse incentives and political dysfunction on an even more massive scale.
To restate the obvious, the NFIP’s problems are myriad. Its maps are out-of-date. It underinvests in mitigation. For decades, it has provided incentives to build in risk-prone and environmentally sensitive regions. It crowds out private competitors. And it is fiscally unsustainable. Over the past 15 years, the NFIP has had to borrow nearly $40 billion from U.S. taxpayers to cover its bills, and it has repaid less than $2 billion of that total.
As Congress once again considers reforms to fix the NFIP, with a committee mark-up potentially as early as next week, the Times proposes we should “do away with the defective flood program,” which is music to my ears.
Alas, the newspaper has something altogether different in mind than I do. It proposes the program should be replaced with a “national catastrophe fund.”
The editorial offers scant details about what this fund would be or how it would work. Those details it does offer are confused and contradictory. Proposals for a national cat fund, which go back to at least the 1990s, traditionally involve creating a federal facility that provides reinsurance or loan guarantees to state catastrophe funds, which in turn provide reinsurance to private property insurers. The goal is cheaper property insurance, with reinsurance provided by the cat funds at below-market rates, ultimately subsidized by taxpayers.
In the Times‘ view, such a fund “would attract private insurers by providing incentives for reinsurance companies” and “would spread the risk of floods, hurricanes, earthquakes, tornadoes, wildfires and other disasters across state lines.”
But reinsurers already spread the risk of all of those perils, not only across state lines, but around the globe. What need is there for a “fund” to do what the market already does? Moreover, the global reinsurance market already has more capital than it knows what to do with. Reinsurers need no new incentives to take on catastrophe risk. They just need that risk to be transferred to the marketplace.
To hear the Times tell it, the national catastrophe fund is preferable to our existing system of disaster assistance from the Federal Emergency Management Agency, which it calls both “an inefficient way to tackle the problem” and one that doesn’t “cover individual losses.” It’s certainly true that the existing disaster assistance framework is inefficient, as it emphasizes post-event relief over far more cost-effective pre-event planning and mitigation. It’s also true that FEMA assistance doesn’t cover individual losses. It’s not designed to. That’s what insurance is for.
But the Times appears to be under the impression that a national cat fund would somehow displace the billions spent on federal disaster relief. This is just flatly not true. While FEMA does make certain grants and loans available to those struck by disaster, the lion’s share of its funds are spent on things like mobilizing first responders and helping state and local governments rebuild infrastructure. There’s no reason whatsoever to think a national catastrophe fund would do anything to stem the spiraling cost of disaster assistance, and quite a few reasons to think it would make it worse.
That’s because the actual purpose of a national cat fund – at least, of all the congressional proposals to date – has been quite clear: to create a bailout mechanism for the Florida Hurricane Catastrophe Fund should a big storm season wipe it out. There has been occasional interest in the subject from congressional representatives of other high-risk states – sometimes New York, sometimes California – who likewise would like to shift risk from their constituents onto federal taxpayers from other states. It should not be surprising that representatives of those other states have not been thrilled at that prospect.
Because ultimately, this Beach House Bailout would face all the same political pressures that have made the NFIP so fraught. Why is reforming the NFIP always such an uphill battle? Because taxpayer-subsidized disaster insurance creates vested special interests who are loath to give them up.
The Times editorial provides all the evidence one needs of exactly that. “Lawmakers,” the newspaper declares, “have proposed large rate increases that would unfairly penalize Florida homeowners, who have paid far more into the fund than they have received in payments over the last 40 years.”
Actually, there aren’t any legislative proposals currently on the table to raise NFIP rates by any more than they are already scheduled to increase. But the notion that NFIP rate increases, which absolutely are necessary, “would unfairly penalize Florida homeowners” relies on two fallacies: 1. That risk-based insurance rates constitute a “penalty” and 2. That “Florida homeowners” are a homogenous mass of similarly situated stakeholders.
It’s true that, over its history, more premium dollars have flowed into the NFIP from Florida, home of one-third of the program’s policyholders, than have returned in the form of claims payments. In fact, this isn’t at all unusual. In an average year, claims payments account for only about 65 percent of the NFIP’s expenses. The other 35 percent goes to standing budget items like floodplain mapping, agent commissions, mitigation assistance and interest on the program’s $20 billion debt. Even if the program regularly broke even, which it doesn’t, it would have to collect more than it pays out in claims just to pay its own administrative expenses.
But leaving that aside, it is true that some Floridians are getting a raw deal from the NFIP. According to the Congressional Budget Office , in 42 of Florida’s 67 counties, the National Flood Insurance Program actually turns an annual expected profit. Indeed, that’s the case in 2,161 of the 2,984 counties in which the program operates nationwide. In fact, even if you threw in another 790 counties where the NFIP projects to suffer relatively small annual shortfalls, it would still be net profitable overall, pulling in about $370 million more than it spends in an average year.
The problem lies in the remaining 33 counties. In each of these 33 counties, the NFIP projects to lose in excess of $10 million in an average year. Altogether, they account for $1.72 billion in annual expected losses, thus accounting for all of the program’s projected $1.35 billion average annual shortfall.
Where are these counties? There’s one each in California, New Jersey, North Carolina and Virginia. There are two in Alabama, three in Mississippi and three in South Carolina. There are four in Texas and five in Louisiana.
And there are 12 such counties in Florida.
Among them are the state’s largest county, Miami-Dade, which is by itself home to about 7 percent of the NFIP’s policies nationwide . Also included are Hillsborough and Pinellas, the fourth- and seventh-largest counties, respectively, and the core of the Tampa Bay Times‘ circulation area.
As a Pinellas County resident myself, I’m certainly sympathetic to the view that the rest of the nation should chip in to allay the cost of my insurance bill. But their failing to do so is neither punitive nor unfair.
On the bright side, there are options for those Floridians who feel they are overcharged by the NFIP (some of them are!) or who are simply fed up with this seemingly never-ending cycle of extensions and expirations. Thanks to legislation adopted in 2014, Florida is home to a robust and fast-growing market for private flood insurance, which has grown 67 percent from 2016 to 2018.
The $79.7 million of net premium written in Florida’s private flood market in 2018 is still just a fraction of the $974.3 million of premium the NFIP writes in the state. But a recent study  by the actuarial firm Milliman finds that up to 77 percent of Florida property owners could find more affordable options in the private market.
The United States suffered 14 separate natural disasters last year that caused more than $1 billion in damages, coming on the heels of 16 such events the year before. It absolutely is time to have a national policy conversation about where we live, how we live, how we prepare for disaster and how we respond. But reviving the long-discredited proposal for a Beach House Bailout is absolutely not the answer.
- “Tampa Bay Times”: https://www.tampabay.com/opinion/editorials/editorial-swap-the-flood-insurance-program-for-a-national-catastrophe-fund-20190603/
- “Times”: https://www.tampabay.com/opinion/editorials/editorial-swap-the-flood-insurance-program-for-a-national-catastrophe-fund-20190603/
- “According to the Congressional Budget Office”: https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53028-nfipreport2.pdf
- “NFIP’s policies nationwide”: https://bsa.nfipstat.fema.gov/reports/1011.htm
- “recent study”: http://www.milliman.com/uploadedFiles/insight/2017/private-flood-insurance-cheaper-nfip.pdf