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This is a classic — the saga of flood insurance.
It's the classic Milton Friedman description of the law of laws. That is, creating a law to address a problem, then learning, surprise, that the law created unintended consequences, which require more laws that have even more unintended, adverse consequences.
And on and on the merry-go-round goes. Where it ends nobody knows.
Florida Sen. Jeff Brandes and Rep. Larry Ahern, two Pinellas County Republicans, know they can't stop the federal law-making merry-go-round, but with Senate Bill 452, they're hoping they can create a different, better ride for Floridians.
Their SB 452 can be described as a private-sector antidote to the flood-insurance ills that threaten so many Floridians.
Let's start with a recap. In the late 1960s and early 1970s, when private insurers abandoned flood insurance policies because of their unpredictability, costs and losses, our political geniuses in Washington did what they always do. They decided the federal government should get into the flood-insurance business. Obviously, without regard to the federal government's record as a business operator (i.e., wretched), congressional thinking was the federal government could do it better than free enterprise.
Forty years later, here's how that turned out: The National Flood Insurance Program is $17 billion in debt to the federal treasury and can't afford to pay more than its $900 million annual interest payment on its loan. And, in the 40 years hence, the NFIP's under-priced, taxpayer-subsidized premiums have led to a massive build-up of homes and properties in even more flood-prone areas than before. Currently, the NFIP insures 5.6 million properties nationwide, a book of business that totals $1.25 trillion in value.
In the words of Dr. Phil, “How's that working for you?”
As we know, not so swell. In its inimitable wisdom Congress decided last year to fix its flood-insurance debt and underpricing by ending the subsidized flood rates and quickly ratcheting up NFIP's premium rates to cover its risk.
We've all read the horror-story results: widows, orphans, senior citizens, average homeowners and small-business owners suddenly unable to afford their skyrocketing flood premiums and on the verge of losing their homes. Rep. Ahern told us of one example of a homeowner being charged $40,000 a year on a property valued at $240,000.
After the predictable public wailing and the threat to their careers over the past nine months, congressional members backtracked on their new rates. Our own Rep. Vern Buchanan and Sen. Bill Nelson were among the champions to persuade Congress at least to delay the exorbitant rate increases ... Until our congressional geniuses find a “permanent” solution.
There is no permanent solution. There are only choices. And if the choice is to make the National Flood Insurance Program actuarially sound, much higher flood premiums must be charged. It's probably a good bet to say Congress will figure out a way to phase in those higher premiums at a more palatable rate.
But all the while this drama was unfolding in Washington and continues to unfold, Sen. Brandes and Rep. Ahern over the summer began looking for a way to bypass Washington and fix the problem at the state level.
Why not free enterprise? Brandes thought. What would it take to create incentives for the private-sector insurance companies to underwrite flood risk?
Brandes says he broached the idea with reputable reinsurers. And surprise, here was their answer: They would do it if they could have flexibility.
Flexibility on rates, deductibles, maximum limits, exclusions and rate-filing procedures. Essentially a free-market approach.
While this scares consumers who think all insurers are plunderers, Sen. Brandes, Rep. Ahern and Senate Banking and Insurance Committee staff members crafted a bill that offers a lot of free-market flexibility, along with some regulations to serve as consumer safeguards. As Brandes put it, if the state is to allow insurers the leeway to customize policies, the state also would want assurances that the companies selling flood policies had the financial werewithal to fulfill claims in the event of disaster and were not charging below-market rates just to win market share quickly.
Brandes and Ahern believe, if approved, this legislation could create a new private-sector flood-insurance market in Florida in a matter of months. “It's not a silver bullet,” Ahern told us. “But it's trying to get a regulatory framework in place from a state angle as an alternative to NFIP.”
One obstacle to this measure's success may be the banks. Current law requires banks and mortgage brokers who sell federally backed mortgages to require homeowners in flood plains to carry flood insurance. Federally backed mortgages also require property insurance from A.M. Best-rated insurers.
Given these two requirements, the question will arise: What will the banks do? Will they approve a mortgage to a homebuyer who wants to buy flood-insurance from a non-government-back private-sector insurer or will homebuyers be stuck with the exorbitant rates of the National Flood Insurance Program?
Rep. Ahern says he has received positive feedback from bankers.
Regardless of what the banks say now, the Brandes-Ahern gambit is worth pursuing. Even though Congress has delayed implementation of the new rates in the Biggert-Waters legislation, who knows what Congress ultimately will approve. At least the Brandes-Ahern legislation is creating an alternative — and in the process doing what the founders envisioned should be done at the state level.
When they formed the republic, the founders envisioned the states as cauldrons of experimentation and competition. This is one of those instances.
Indeed, to no surprise, the federal government has proven to be totally inept as the one-size-fits-all market for flood insurance. And the likelihood of Congress finding a “permanent solution” is about as likely as Congress balancing the federal budget.
While the Brandes-Ahern bill and concept may have its skeptics and unknowns, here is an opportunity for policy makers to get off the endless merry-go-round of lawmaking and let the free hand of the market fill a need.
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