26 July 2010

Federal flood insurance

...continues to fail. JWT sent this article on the bureaucratic delays that are keeping people in New Orleans from moving into their homes because flood insurance is taking too long to process.

Please tell me why the Feds are in this business? They know nothing that a private company does not; their subsidies lead people to pay too little to live in dangerous places; their paperwork keeps real estate markets from functioning.

Bottom Line: The government should NOT be involved in some markets, because it only screws things up.

1 comment:

David Zetland said...

WEH emails: "Flood insurance is an insurance product that suffers from anti-selection. That is, property owners in close proximity of a flood hazard purchase coverage while those with little perceived flood hazard do not buy flood insurance. Insurance is based on homogeneous exposure units spread over a wide geographic area. Flood coverage ends up concentrated only in flood prone areas. Hence the government becomes the insurer of last resort because anti-selection is either non insurable or insurable at very high prices by private insurers. Hence flood insurance is considered to be a money loser over the short, medium, and long term.

When the national flood insurance program was established the private insurance industry was invited to participate but the government wrote all the rules. The private insurance sector declined to participate as the rules and regulations where written without their input and the resulting underwriting rules made no sense. For example, you could buy a policy with no waiting period and subsequently cancel and get a refund of unearned premium. Big deal?!? It becomes a big deal when you use the no waiting period and cancellation provision as a purchase/cancel management tool. One prime example was people along the Mississippi river. When periodic abnormally high winter snows began to melt in the areas of the head waters, flood waters began moving down the Mississippi. People could watch TV and see predications of when the flood would occur in their area of the Mississippi. Hence many people would suddenly purchase flood insurance, and if loss occurred they would collect coverage then cancel the policy and receive a refund to boot. Those that purchased but managed to avoid flood damage would cancel and receive a refund for the balance of the unearned premium.

Many years later the flood program was in financial ruin and had only a small book of business. The private insurance industry was invited back to participate and this time around the government took the advise of the private insurers. Waiting periods are only waived in specific circumstances e.g. home closing and otherwise a 30 day wait exists before coverage exists. Premiums are paid annually and all premium is earned and refunds are only issued when property is sold.

Many private insurers then began to market the product under the “write your own” plan with insurers issuing and administrating policies on behalf of the federal flood program. Also a “preferred policy” was made available for people outside major flood zones. These preferred policies have very modest premium and are sold in prepackage coverage levels (structure and content). The result was that the book of business grew exponentially.

Some private insurers do issue “excess” flood policies where an existing federal flood policy is in force but is insufficient to cover the total value of the property.

Also, federal flood insurance is a federal plan meaning that properly licensed agents and brokers can write coverage in any state rather than only writing coverage, such as auto, home, commercial property, etc. in states they hold specific state licenses (resident/non resident specific state licenses).

Moreover, the article you referred to in The Times-Picayune is correct that the national flood insurance authorization and hence funding has lapsed several times this year. Hence the on-again off-again authorization is clearing affecting home closings. That in many cases commerce grinds to a halt without the ability to transfer risk to a third party which in many cases comes in the form of insurance."