Tag Archives: flood insurance

Here We Go Again

Well it was a nice lull while it lasted.  For better than ten years following the chaos caused by Katrina and other mid-2000s hurricanes, North America has enjoyed pretty tame hurricane seasons, with the notable exception of Superstorm Sandy in 2012.  Then along came Harvey last month.  Now we’re staring down mega-hurricane Irma about to descend on Florida.  As if two major hurricanes in only two weeks isn’t bad enough, Jose lurks out there in the Atlantic though it looks like we may dodge that bullet.  All of this and we’ve still got more than a month left in the hurricane season.

Cue the media hysteria.  I realize that we live in the era of the 24-hour news cycle, and Jim Cantore would be an utterly lost soul if he weren’t firmly ensconced at ground zero of every major storm.  We’ve had never-ending 24-hour coverage of Harvey’s development, Harvey’s landfall, Harvey’s aftermath, Irma’s development, preparations for Irma, and we’ll be hearing about Harvey and Irma for the next several weeks.  I do not intend to minimize the human tragedy of these storms, but I am wary of the indictments that will inevitably flow from all this media hype.  We’re already seeing it…

Predictably, climate change is already being linked with the current roster of storms, such as in this doozy of an article from Newsweek.  The article relies on alleged climate data manipulator Michael Mann.  I hope all of you Florida evacuees heading north on I-75 realize that you’re setting the stage for the next Irma as your internal combustion engine idles in the traffic jam.  Talk about a Catch-22.

The Wall Street Journal recently highlighted hurricane deductibles as the reason that many hurricane victims will find themselves shouldering 1-2% of their hurricane loss.  The slant of the article (and others like it) portrays insurers as greedy companies looking to stick it to their policyholders at every turn.  Let me see if I have this straight.  My beautiful Florida home suffers a $500,000 hurricane loss, and I’m distraught that I have to cover $10,000 of that loss out of my own pocket before my insurer covers the remaining $490,000?  Sure, $10,000 is a chunk of change, but would I have really wanted to pay the actuarially-mandated premium to have hurricane insurance with first dollar coverage (assuming I could even find such coverage)?  Nope.  Even a $10,000 hurricane deductible is a fair price to pay for living in a beautiful coastal home in paradise.  Or at least it should be.  The hurricane deductibles were a necessary component to keep the private hurricane insurance market from evaporating after Katrina thus giving us yet another incarnation of the notoriously underwater (pun intended) National Flood Insurance Program.  NHIP anyone?

Speaking of flood insurance.  There are also hundreds of articles and reports on the uninsured and underinsured flood losses from Harvey, and more will follow from Irma.  Yes, the NFIP is woefully outdated and in debt.  Even for the minority of homeowners and businesses who purchase flood insurance, the program limits (e.g., $250,000 on a home’s structure, no business interruption coverage at all for businesses) leave many underinsured.

Although a certain amount of media attention is helpful in calling attention to problems that need solving, I fear that what we have in most of today’s media hype is politically motivated hyperbole that exploits the actual victims of these natural disasters in order to advance an agenda (e.g., climate change, anti-capitalist, etc.) It would be nice if we could just tone it down a bit and focus on genuine problem-solving instead of slanted accusation.

In the spirit of genuine problem-solving, insurance guru Bill Wilson recently blogged about the concept of mandatory flood insurance coupled with strict loss control.  Is that an idea whose time has finally come (or perhaps is long overdue)?  The logic is compelling, but then we’d better be prepared for another batch of media reports on how outrageously expensive mandatory flood insurance has become, how unfair the tax penalties are for those who can’t/won’t buy mandatory flood insurance, how onerous are the loss control requirements, and how the flood insurance exchanges are suffering from unexpected losses and need to be taxpayer-subsidized, and the whole flood insurance system is in a death spiral.  Sound familiar?

My sincere thoughts and prayers are with you Florida, and Texas.

 

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Hard Lessons of the Louisiana Floods

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Louisiana, and particularly Baton Rouge, was hit by severe flooding last month.  The photographs of destruction and displaced families are heart-wrenching.  Unfortunately, with the election season ramping up to full throttle, the devastation of Louisiana is already being crowded out of society’s attention.  Ordinarily, I would expect that relief agencies and compassionate individuals ought to have the situation well in hand, and that insurance mechanisms have kicked in to help the flood victims rebuild their lives.  Everything working as it should, the flood damage is sad and inconvenient (to put it mildly), but the situation should be manageable.  Time to move on.  Next crisis, please.

But that’s not the case.  Oh, it is true that many of us have moved on to other things… the circus that is our election season, the arrival of the college and pro football seasons, even the next big storm as tropical storm Hermine makes her way up the U.S. east coast.  But the situation in Louisiana is not under control.  Many people have literally lost everything… their homes and their possessions.  So why hasn’t flood insurance done what it is intended to do by helping these people rebuild their lives?  Because more than half (55%) of the state’s residents living in high-hazard flood zones did not purchase flood insurance.  Even worse, 88% of those living in low-to-moderate hazard zones (which were affected by this particular flood) did not buy flood insurance.  One Baton Rouge resident said, “You think, ‘I’ll never need that, I’ve never seen water come up this high.’”

The best that these uninsured residents can hope for is a FEMA grant with a maximum amount of $33,000, and perhaps a low-interest federal government loan to rebuild.  For many, that just won’t cut it.  By the way, this isn’t just a problem for those who have lost their homes and possessions, it is also a problem for society that faces the prospect of hundreds, perhaps thousands, of blighted properties.

This is not a call for a massive government bailout of these unfortunate individuals, nor is it a call for tighter regulations that would make flood insurance mandatory for even the slightest exposure.  My major concern is what is going on in the minds of these property owners that would cause them to act seemingly irrationally by foregoing flood insurance?  With several public service announcements broadcast on behalf of the National Flood Insurance Program to raise awareness of the exposure and the NFIP solution, ignorance does not explain it.  It seems more likely that the sparse flood insurance purchases are a manifestation of the old saying that “you can lead a horse to water, but you can’t make him drink”  (no pun intended).  The average cost of flood insurance for Louisiana homeowners is around $700/year and would have covered up to $250,000 on homes and $100,000 on personal property.  That’s not an outrageous expense, to protect the most significant asset that most people own.

So why didn’t more people have flood insurance?  The “it-can’t-happen-to-me” attitude should have been swept away by hurricane Katrina, super-storm Sandy, and many other weather events of recent memory.  I don’t have the answer, and it pains me because I love the power of the insurance industry, its product, and its people to move into disasters such as this and put people’s lives back together.  When the people in need of the help fail to take the minimal steps (relatively speaking) to protect themselves by securing the powerful insurance mechanism for their own benefit, I feel for them and I long to send them back in time so that they might make a better choice.  Unfortunately, they will have to serve as hard lessons to those who still have time to make that better choice, and prepare for disaster by securing the proper insurance.  I only hope that the next victims of flood, fire, windstorm, hail, etc. are watching and learning from the despondence of Baton Rouge.

NFIP Hatchet Job

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The National Flood Insurance Program (NFIP) administered by the Federal Emergency Management Agency (FEMA) is a mess.  The program’s fiscal house is far from being in order, and now a PBS/NPR documentary reveals the ineptitude of the government management of the program.  In the process, the insurance industry gets attacked and left with a black eye, partly because it didn’t fight back against the inherent bias in the reporting.  According to the report, no insurers agreed to be interviewed for the documentary – that looks great.

In the meantime, the reporter grills interviewees about “how much profit are the insurance companies making on this program?”  To be clear, the claims are paid by the government, and the insurers are receiving fees from the premiums collected to cover the services they provide in administration of the policies.  Yet, the report makes a convoluted argument that insurers are delaying or settling claims for low-ball amounts because of concern that Congress will kill the program if costs are not kept down.  Totally illogical given that the insurers are not paying the claims with “their money” and if there is a true concern about “killing the golden goose” then why would the same insurers be charging excessive fees for their administration services?  Still, no insurers step up to defend themselves.  Personally, my response to the self-righteous reporter’s question about “how much profit?” – “Not enough for having to deal with the federal government bureaucracy, sweetheart.”

Okay, so I’m no public relations genius.  Nevertheless, it’s irritating when the media launches these investigative hatchet jobs on predictable targets and perennial “bad guys” such as the insurance industry.  Where are the reports vilifying the manufacturers of hammers and toilet seats after the exorbitant Pentagon spending on such commodities made news years ago?  Worse yet, why won’t the insurance industry fight back?  The allegations of “excessive profit-taking” (an oxymoron to a free-market capitalist libertarian such as myself) are left out there, hanging in the air, polluting the image of the industry at the same time we are trying to convince young people to consider a career in the industry.  You want to see a really ugly mess?  Let the federal government manage the entire program – from policy issuance to claim settlement. [Insert your favorite postal service joke here.]

Insurance is a noble industry and profession.  We help put people’s lives back together (when the government stays out of the way), and we grease the cogs of economic activity.  It’s time for the insurance industry to stand up for itself more forcefully.