Why can’t the cost of flood insurance rise?
Ben Berkowitz has a big report on the the National Flood Insurance Program — something which is a veritable bucket of fail. In a nutshell, it undercuts private insurers and therefore is the only game in town; it insures only a small minority of homeowners; and it loses gobs of money. In September 2005, the NFIP was $1.5 billion in hock to the federal government; that number has now ballooned to $21 billion, and is certain to rise further.
There’s a simple answer to all these problems: let the NFIP raise its rates. And I don’t understand why it’s not being allowed to do so. If the rates rose, then that might allow private insurers into the flood-insurance game, giving consumers a choice and helping to get the word out about how insuring your home against flood damage is a really good idea. The NFIP could become profitable, and thereby start paying back all the money it owes. And while homeowners are quite price sensitive when it comes to flood insurance, the fact is that so few homeowners take out flood insurance right now that the number would be unlikely to fall dramatically if rates went up to a reasonable level.
The NFIP, then, is in a fundamentally much better place than, say, the Post Office, which is also losing billions of dollars but which doesn’t seem to have any way out of its present quandary. And I’m still very unclear on what the problem is here — what vested interests are preventing the NFIP from raising its rates. It’s not that people couldn’t afford flood insurance if the rates went up — the rates are very low right now, and in any case most people aren’t paying them anyway, with 95% of homes uninsured.
Are the 5% of homeowners who take out this insurance people with particular political clout, fighting hard and successfully to prevent even a modest increase in their modest premiums? Is the political opposition coming from legislators who don’t want to vote for anything which smells as though it might be related to global warming? Or is this just general low-level government dysfunction? Whatever it is, the problem seems to reside, weirdly, in the Senate rather than the House — a plan to allow NFIP to raise its rates has already passed the House by a vote of 406 to 22. If that lot can come to bipartisan agreement, what could possibly be the holdup here?