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.
For many consumers and citizens, the mention of insurance and government elicits fear and loathing. Looking beyond the initial reactions and the stereotypes, we realize that both are necessary components of an orderly, prosperous economy and society. Insurance and government are necessarily intertwined, ranging from social insurance to regulation to market support. There are currently two prime examples of this relationship and the ongoing dance between the private insurance industry and government.
First, the National Flood Insurance Program (NFIP) is in bad shape, $24 billion in debt. In a rare demonstration of fiscal responsibility, the US Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012. The reform would have phased in premium rates that were more reflective of the flood risk and updating the flood maps on which premium rates are based. I say “would have” because the politics of Biggert-Waters has led to its unraveling through subsequent legislation that basically undoes much of the original reform. Politicians’ knees became weak when flood-prone property owners and the realtors who sell such properties were inflamed by the eventual rise in flood insurance premiums. So the government’s fiscal train-wreck that is the NFIP is off the track once again.
The second example is the imminent expiration of Terrorism Risk Insurance Act (TRIA) later this year. After the September 11 attacks, it was apparent that the private insurance industry could not insure the losses connected with a major act of terrorism. In order to stabilize the insurance market and the terrorism exposures of our post-9/11 world, the government stepped in with TRIA which provided a government “backstop” to cover up to 90% of terrorism losses above certain thresholds. The looming expiration of TRIA has rattled the insurance marketplace because of the uncertainty over the future of the government’s terrorism backstop and its structure if it is renewed. There are some credible arguments against renewing TRIA altogether. Insurers are already hedging by writing policies that expire at the same time as the current TRIA law so that they can write new policies with different terrorism coverage provisions in response to a possible world without TRIA, or a radically different TRIA. The point is, once again the government and the insurance industry are very much intertwined, for better or worse.
There are many, many finer points in both the NFIP reforms and the TRIA expiration/renewal that I do not have time to explore here. The larger point that led me to raise these two issues today is the ongoing and unavoidable interaction between the insurance industry and government. Although these examples both originate at the federal government level, there are countless issues at the state government level – Michigan no-fault auto insurance reforms being a prime example. The libertarian in me prefers government to get out of the way of private insurance and let the markets sort it out, but the pragmatic economist in me knows that there has to be a government role in insurance. I just wish the dance between these two giants wasn’t so darn ugly.