They say politics makes for strange bedfellows, but I thought April Fools Day had come early when a news release hit my e-mail this morning announcing that the Reinsurance Association of America was on the same side as the industry's chief critic, Bob Hunter of the Consumer Federation of America, in opposing expansion of the National Flood Insurance Program to include wind damage.
As reported by our own Matt Brady, Mr. Hunter, CFA's insurance director, has indeed joined a consortium that includes RAA–along with various tax and environmental advocacy groups–to discourage the Senate from adding wind coverage as part of the Flood Insurance Reform and Modernization Act of 2007.
(For the complete story, click here.)
The House has already passed a bill including a provision to add a wind coverage option to NFIP's menu, sponsored by Rep. Gene Taylor, D-Miss.–who had to sue State Farm to get his own Hurricane Katrina claim settled following a dispute over wind versus flood damage.
This is a bad idea–not in theory, because in the real world it makes sense for a homeowner to be able to protect themselves against all hazards in one insurance policy–but in practice, because the NFIP has been such an utter disaster! The program was shamefully underfunded, in large part because its premiums are never actuarially sound.
The fact that even Bob Hunter agrees with the industry's position–a move he admits warrants a headline of man bites dog–proves beyond any reasonable doubt that this would be a counterproductive move.
Mr. Hunter has been no ally of the industry in wind-versus-water disputes, but his major objection to NFIP's proposed expansion echoes that of the industry–that essentially dumping subsidized wind coverage into the insurance market would do more harm than good in the long run by encouraging more construction in catastrophe-prone areas.
Of course, the bill's sponsors assure us that rates would in fact accurately reflect risk, but their credibility is sadly lacking since the NFIP has never been on a sound basis from a rating perspective. With a public facility like NFIP, the political pressure is simply too great to appease voters by underpricing insurance coverage. That would make it easier to build in coastal areas–which is the last thing we should be doing.
If this expansion is approved, it not only would increase exposure, but would add another shaky floor to a federal program that already has a rickety financial foundation.
Mr. Hunter shrugged off the significance of his odd and temporary alliance with the industry he loves to harass. I dont usually align myself with them unless its something I feel is important,” he told Mr. Brady. “The insurance industry is strong enough. They dont need me.
However, I think it would be a mistake to underestimate the importance of having someone with the credibility of Mr. Hunter on the industry's side in making the case against adding wind coverage, given his decades-long dedication to protecting consumer interests. Indeed, his backing of the consortium could prove to be the tipping point against the proposal.
Debate over the controversy will come to a head this summer, since Congress must reauthorize the NFIP before it expires on Sept. 30.
The battle to keep wind out of NFIP won't be easy. Powerhouse Sen. Hillary Clinton, the New Yorker looking to win the Democratic nomination for the White House, is solidly behind the bill–in fact, she introduced the Senate's version of the legislation passed by the House, and is lobbying Sen. Chris Dodd, who chairs the Senate Banking Committee, to support addition of wind coverage.
That's going to be an uphill battle, as Sen. Dodd–the Connecticut Democrat known for his support of the Hartford-based insurance community–has already sent different legislation to the floor that does not include coverage for wind risks. (Click here for that side of the story.)
Action has stalled because the Senate bill–sans wind coverage–is being held up, reports our own Dave Postal, due to “objections by Louisianas senators, who have expressed concern that the provision for a change to actuarial rates would make the program unaffordable to many Louisiana residents.” And you thought the cost of flood insurance couldn't be politicized!
Sen. Clinton has good reason to add wind coverage to the NFIP, given the increasingly hard time facing her constituents on Long Island when trying to get affordable homeowners coverage, with many private carriers pulling back and hiking rates in fear of a monster hurricane storming up the East Coast sooner rather than later. As a Brooklynite living a mile or so from the ocean, I can even sympathize.
But I doubt the NFIP is the solution rather than a big part of the problem. An editorial in today's “Roanoke Times” summed it up best:
“Everything bad about the National Flood Insurance Program–it encourages development in flood-prone areas, pays homeowners to repeatedly rebuild where they should not, and forces inland taxpayers to assume risk taken by often wealthy homeowners who choose to live near or on the coast–would be magnified by a proposal to have the program cover wind damage.”
The editorial adds pointedly: “This is a rare time when corporate interests and public interests coincide…[W]hy should the federal government go where private insurers fear to tread?”
Its conclusion was even more devastating to supporters of coverage expansion. “If anything, the federal government should be moving out of the flood insurance business, not expanding into hurricane coverage.” (For the complete editorial, click here.)
RAA President Franklin Nutter was right on when he observed that the diversity of the consortiums membership demonstrates that NFIP is much more than an insurance issue.
It's hard to imagine Congress rejecting the common sense case made by such a wide-ranging coalition representing both insurance providers and consumers. But Congress has been known to take steps that have nothing to do with common sense, especially in an election year.
Of course, even if Congress somehow agrees to add wind coverage, I have no doubt President George W. Bush would veto any such move. With expiration looming on Sept. 30, the NFIP thus could become this year's version of TRIA, complete with 11th hour political brinksmanship at the height of the presidential campaign season.
My guess is that proponents will have to postpone their fight to expand NFIP for another day, or risk seeing the program lapse entirely, leaving millions at risk.
What do you folks think?
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