December 30, 2013

Over the past couple of weeks we have been hosting an open forum on flood insurance and whether there ought to be a natural disaster insurance that covers perils like floods, windstorms and earthquakes.  What we are seeing develop are different positions and, interestingly enough, we find ourselves agreeing, at least in part, with both camps!   One group is saying, we cannot trust the government.  Look at what they did with ObamaCare.  Look at how the administration is making decisions “on the fly” about what parts of the law they will follow and which they will not.  We need less government and not more, and having natural disaster insurance sounds like a continued expansion of an already intrusive government.

Others are saying it’s not government’s role to pay for storm losses.  “If people want to live in areas where there might be floods, then they need to accept the risk.  At least the Briggs-Waters Act requires premiums to be in line with risk factors and tied to market rates.” 

Meanwhile others would argue that if we go down the road envisioned by this legislation, those who own property in coastal areas will not be able to afford to live there anymore and they would not be able to sell their homes -- who is going to purchase a property where the projected annual flood insurance premium could be $15,000-$30,000?

Last week we mentioned in passing that the Federal Deposit Insurance Corporation (FDIC) model might be worth considering.  The FDIC was created by Congress in 1933 as an independent agency.  It receives no Congressional funding – it’s funded by premiums the banks and thrift institutions pay for the deposit insurance coverage and from earnings it makes on investments.  It was originally funded by a $289 million loan from the federal government which was paid back with interest.  Congress continues to maintain oversight responsibility over the FDIC. The deposits are backed by the “full faith and credit of the United States Government” although it is difficult to find a statutory basis for this claim since the only supporting legislation on the books is a non-binding “Sense of Congress” resolution passed in 1987.  The FDIC establishes the liquidity guidelines a bank must meet in order to qualify for insuring deposits.

So what if we followed the FDIC model and created a federal corporation that received no appropriation from Congress but which offered to insure private sector insurance companies that meet liquidity guidelines and provide natural disaster insurance to the public?   Like the FDIC, they would not sell insurance directly to the ultimate consumer but instead would help mitigate the risks of private sector insurance companies that do.  Insurance companies have shied away from offering flood and windstorm insurance in coastal areas.  Would this help them manage the risk and coax them back into the market?  We are not experts on the insurance business.  We are simply looking for a free-market private-sector solution instead of just kicking this can down the road or throwing federal dollars at the problem.  If you are in the insurance industry and want to comment about this suggestion, we welcome you to the discussion!

Mark, Bill and John