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

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

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

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

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

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

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

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

Prof. Scales' proposal, she reported, would “phase out floodinsurance subsidies on older homes over the next 15 years so thatwealthy people wouldn't benefit, but the government could helplow-income homeowners who couldn't afford the higher prices [forcoverage].”

The article noted that “to have true risk-based pricing, thegovernment would have to update the floodplain maps,” reportingthat Prof. Scales “suggests turning the maps over to the insuranceindustry to maintain, since they would have a financial interest inkeeping them up to date because they'd be on the hook for a portionof the flood claims before the flood reinsurance kicked in.”

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

I personally think that If this were to work at all, the floodpremiums would have to remain in a fund controlled by privateinsurers, which could be tapped to quickly pay claims. But I cannotimagine Congress sitting still for that, since the old concernwould arise that insurers would dump wind-related water damage inthe government-paid flood pool.

However, if the government controls the reinsurance pool, andforces insurers to prove a claim was flood-related before offeringreiumbursement, insurers would no doubt balk because of their fearthat Uncle Sam would deny all but the most obvious claims, leavingprivate carriers on the hook for the rest.

Of course, insurers could suggest withholding payment of floodclaims until the government at least promises reiumbursement, butconsumer 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 thinkthe idea, while intriguing, is a non-starter. This is one trialballoon unlikely to get much altitude or hang time.

What do you folks think?