The U.S. Senate rejected an amendment yesterday to add wind coverage to the National Flood Insurance Program. Good for them, especially for Senate Banking Committee Chairman Chris Dodd (D-CT), who urged members to vote against it. However, challenges for bringing rationality to both federal flood insurance and state-based windstorm insurance remain, with Sen. Dodd telling members, “Wind is an issue we have to grapple with, but the last thing we want to do is destroy a flood program which we very well could by overwhelming it.”
The problem with both flood and windstorm insurance is that both are largely controlled by government. We don’t see the problems with flood insurance because the costs are buried deep within the federal budget. Windstorm costs, however, are on the backs of state taxpayers and much harder to hide. In Texas, taxpayers and homeowners’ insurance policyholders could be on the hook for more than $5 billion if a major hurricane hit the upper Texas coast. The situation is much worse in Florida.
That is why states like Florida and Mississippi are trying to get Congress to add windstorm coverage to the flood insurance program. Spreading the cost of windstorm insurance to all U.S. taxpayers would allow them to continue subsidizing coastal insurance premiums.
Of course, it is just not insurance we are subsidizing, but coastal development. With greatly reduced premiums, homeowners and businesses do not have to take into consideration the actual costs of protecting themselves against the risk of hurricanes. As a result, coastal development is exploding, along with the exposure of taxpayers and policyholders elsewhere.
It will take a while to fix this mess, but the first step is to increase the prices of government flood and windstorm insurance so that they better reflect the actual risk being insured. As this occurs, the exposure of government programs will begin to decline to a level that we adequately address the issue. Until then, all we can do is hope the big one doesn’t come our way.
– Bill Peacock