The Dilemma
As we start into the flood insurance season again, the government is wrestling with what to do with the national flood insurance rates administered by F.E.M.A (Federal Emergency Management Administration) on behalf of people who are required to carry a flood insurance policy. For an in-depth narrative regarding F.E.M.A. see “Flood Insurance NFIP” under https://www.insuranceguidelocal.com/articles/the-national-flood-insurance-program-nfip/
Why the Dilemma
This dilemma has been created due to several factors such as private insurers being reluctant to build a product which will deal with flood damages. Due to the unpredictability of when a loss will occur and the severity of it when it does occur, insurance companies have been reluctant to establish rates and enter that market. They feel they just cannot project the potential loss and charge a premium commensurate with that potential loss. This low frequency but high severity equation does not lend itself to actuarial calculations very well, so underwriters are left with one option and that is to remain on the sidelines when consumers come looking for someone to take that insurance risk.
With projects like the Tennessee Valley Authority bringing electricity to rural communities, flood prone areas became targets for land developers to purchase land for housing developments. This of course exposed the issue of who would provide insurance coverage in those areas. None of the private companies were willing to add flood insurance to their list of insurable perils, so politicians saw an opening and filled the void with the National Flood Insurance program administered by F.E.M.A.
F.E.M.A. determined they would do the underwriting and claims adjudications but would allow private insurance agents to actually write the policies and get commissions for doing so. By setting it up this way, F.E.M.A. missed out on the expertise which they could have taken advantage of in the years of underwriting and claims experience private insurance companies could have brought to the table. They also had no profit incentive, so no real safeguards were built in to manage the expenses.
Another serious issue which F.E.M.A. has to address is the paying for losses and then having the paid-for structures being built right back in the same flood prone areas. This has been going on for so long, it may be that the horse is out of the barn and can never be corralled. Until this issue is addressed, land developers will continue building in flood prone areas, and existing homeowners will continue to have the losses subsidized by federal tax dollars.
A third area of exacerbation is the method of determining who is required to carry flood insurance. With existing maps showing flood zones, a carte blanche approach is utilized even though there may be topographic fluctuations like hills which would require water to rise to the level of Noah’s Ark before any flooding could occur. Lenders going by these maps are unrelenting even though a homeowner can show on a topographical map that they would not ever be affected by a flood. The lender has the attitude, if you want the loan and you are in a flood zone no matter what your elevation may be you must obtain and then maintain a flood insurance policy.
Possible Solutions
There seems to be a consensus that something needs to be done with the rates to bring them into a closer actuarial balance with the potential losses. Yet Senate Majority leader Chuck Schumer is balking along with President Biden in that “resilient efforts must consciously protect lower income communities from ‘green gentrification’”.
They are concerned that somehow “green gentrification” which is a process of cleaning up pollution and providing green amenities like solar panels, trees, parks, waterways, and bike paths will cause lower income families to be forced to sell their homes to developers who can afford the increased premiums, upgrade the structures and then in turn either rent to wealthier tenants or sell to new homeowners.
What do Schumer and Biden have in mind when they refer to resilient efforts needed to protect lower income communities? No doubt some government programs will be developed to create a source of revenue for communities to plug into so when the pressure becomes too high for requiring owners of property in flood prone areas to pay their own way in the event of flood loss, those landowners can get bailed out with subsidies.
No one wants to see someone lose their home to a flood, but when it occurs over and over, why not give an incentive to those repeaters to build elsewhere. Swapping land in flood prone areas for land at higher elevations could be a viable alternative for all parties concerned. Those flood prone areas could be developed into golf courses, parks, green areas where flooding may cause damage but would be significantly less than otherwise.
If building back is still the course a community is going to follow, then adjust the architectural requirements to reflect the flood risk. This would just require the will power to make the change. Sadly, no politician is going to die by falling on his or her sword for this cause–too many other bigger fish to fry.
Progress toward Future Solution
Another innovation is emerging in that some private insurance companies, i.e. Allstate, MetLife,Travelers, etc. are starting to slowly move into this market. With the potential for increased revenue and advancements in technology, this is an insurance moment in time. Though they are not totally independent of outside support, the more familiar insurance companies become with how to underwrite and settle claims, the more they can solve this problem. It is amazing how a capitalistic approach can solve many social problems which otherwise go begging into the swamp of government bureaucracy.
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