I’ve been thinking about flood insurance since the hurricanes this year. Leave it to John Oliver to steal my thunder and beat me to the punch! Sunday night he summed up the problems with the federal flood insurance program, which I’ve linked to through the sidebar to the right.
Rather than recount what Oliver so brilliantly expounds in his 20-minute rant, I want to talk about a couple of problems I see in a little more depth:
- We seem to have (intentionally?) forgotten what insurance actually is.
- With regard to flood insurance in particular, I fear our current system is, like many good ideas, on Locomotive Breath’s train to unsustainability.
What Is Insurance?
At its best, insurance is a bunch of people banding together to spread a given risk over a wide enough pool that none of the participants gets wiped out by a single occurrence. Or put another way, it is people who don’t need help agreeing to help those who do when a disaster of whatever magnitude happens. One of the first insurance companies in the United States was the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, started by Benjamin Franklin. It was a mutual insurance company, owned by and managed for the benefit of its policy holders. That’s right. The primary fiduciary responsibility of mutual insurance companies is to the policy holders who are in fact the owners of the company. Contrast that with stockholder companies or privately held insurance companies whose primary responsibility is to the ownership, not the insured.
There are three things required for insurance coverage to be available:
- A common risk
- A large enough pool of insureds to spread that risk among
- An agreement on price
This last factor is usually the most important. The premium paid for the insurance must be large enough that the insurance company is willing and able to assume the risk without being so large that the potential insureds would rather take the risk than pay the premium. If that reminds you of our healthcare debate, you’re right. The size of the pool must be large enough for people who don’t need the insurance in any given year to pay for those who do. It’s sort of a capitalistic version of socialism.
The pricing problem is what got the federal government into the business of subsidizing flood insurance premiums in the first place. Only people who really, really needed flood insurance were likely to buy it. And that problem continues today. Only people in floodplains who are required to buy flood insurance do so. (The problem for the people who don’t is they can’t be sure whether or not they’re actually in a floodplain because keeping flood maps current, like much or our infrastructure, hasn’t been adequately funded for decades. So an acquaintance of mine lost more than 40 rent houses to the Harvey floods, none of which had flood insurance, because none of them were in an official floodplain.)
That meant the pool was insufficiently large to bring pricing down to the point even people who need flood insurance were willing or able to afford the premiums. So the federal government agreed to pay part of the premiums to protect its investment in federally guaranteed mortgages. Congress apparently thought that if a house flooded repeatedly, people would leave. But as Oliver points out, who wants to buy a house that floods repeatedly? I wouldn’t. And that lack of marketability traps both the homeowners and the federal government. The homeowners are forced to (okay, some want to) stay in unsafe housing. The federal government is forced to keep repairing those houses through successive floods.
Some will view my solution to this problem is more than a little draconian. I don’t think we should subsidize flood insurance after the second occurrence. Yes, that puts homeowners who can’t sell their houses at risk, but I want to offer a lifeline. After the second occurrence, FEMA should be required to buy the house at full market value (for similar houses outside the floodplain), should the homeowner choose to sell. If the homeowner elects not to sell, they should bear the cost of all future repairs themselves.
And after FEMA purchases the house, it should be razed with the lot accruing to a parkland of some sort that could be used for the common good.
Some of my more conservative friends will complain that this idea smacks of socialism. So what? Having the federal government be responsible for the repair of private property is already a socialist solution. And simply cutting off the flood insurance program would not be humane. My solution would also enable those who are wealthy enough—those whom Oliver points out collect the vast majority of flood insurance payments—to maintain their flood-prone properties on their own nickel (conservative enough yet?) while providing a livable out for those who want out.Hermann says please like and share!