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Now that it's clear Congress won't be adding wind exposures to the National Flood Insurance Program anytime soon, should private carriers be forced to write coverage for both risks in one policy, and then have the government reimburse them for flood-related claims? That's the trial balloon being floated by one academic.

Rebecca Mowbray of the New Orleans Times Picayune filed a story on May 11, headlined “One-Stop Storm Policies Proposed,” that lays out the idea suggested by Adam Scales, an associate professor at the Washington and Lee School of Law in Virginia. (Click here for the full story.)

“Rather than having homeowners buy two policies–a flood policy from the government and coverage for fire, theft, liability and wind from a private insurance company,” reported Ms. Mowbray, “Prof. Scales advocates making [insurance] companies sell policies that would provide all the coverage people need and having the government reimburse the companies for flood claims.”

The idea, she reported, is that “changing the flood program from a retail venture to a reinsurance program operating behind the scenes would allow consumers to collect one insurance check and start rebuilding their homes and the broader economy, while leaving any disputes for the companies and the government to resolve.”

Her article added that “mandatory coverage would also solve the problem of not enough people having flood insurance, and would put the program on better financial footing,” according to Prof. Scales.

“It would push disputes up one level to the wholesale level. Now you would have an argument, say, between State Farm and the federal government about how to deal with the aggregate loss,” said Prof. Scales. “It clearly makes the wind-water distinction meaningless to the average consumer.”

Ms. Mowbray reports that under Prof. Scales' plan, “everyone would be required to have flood coverage on their insurance policies, but it would be pricey for people who live in flood-prone places like New Orleans or near a river, and just a few dollars for those whose homes risked flooding only in freak circumstances.”

Under the scheme, private homeowners insurers would collect the premiums, she noted, “and then would buy a flood reinsurance policy from the government that would cover most of their losses,” adding that “eventually, companies might even sell catastrophe bonds in private markets to cover their flood risk.”

Prof. Scales' proposal, she reported, would “phase out flood insurance subsidies on older homes over the next 15 years so that wealthy people wouldn't benefit, but the government could help low-income homeowners who couldn't afford the higher prices [for coverage].”

The article noted that “to have true risk-based pricing, the government would have to update the floodplain maps,” reporting that Prof. Scales “suggests turning the maps over to the insurance industry to maintain, since they would have a financial interest in keeping them up to date because they'd be on the hook for a portion of the flood claims before the flood reinsurance kicked in.”

The Property Casualty Insurers Association of America is quoted in the article as being concerned, as would most of the industry, about the odds of getting repaid by the government in a timely fashion–if at all.

I personally think that If this were to work at all, the flood premiums would have to remain in a fund controlled by private insurers, which could be tapped to quickly pay claims. But I cannot imagine Congress sitting still for that, since the old concern would arise that insurers would dump wind-related water damage in the government-paid flood pool.

However, if the government controls the reinsurance pool, and forces insurers to prove a claim was flood-related before offering reiumbursement, insurers would no doubt balk because of their fear that Uncle Sam would deny all but the most obvious claims, leaving private carriers on the hook for the rest.

Of course, insurers could suggest withholding payment of flood claims until the government at least promises reiumbursement, but consumer advocates aren't likely to go along with that.

Bottom line, there is simply not enough trust among consumers, insurers and the government to pull this off. Therefore, I think the idea, while intriguing, is a non-starter. This is one trial balloon unlikely to get much altitude or hang time.

What do you folks think?

Special Reports /

Would One-Stop Storm Policies Do The Trick?

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