I sometimes wonder if there isn't an insurance executive or two who ponders whether the industry struck a Faustian bargain when it agreed to partner in the Write-Your-Own program. Essentially, under WYO, private carriers use their paper to write and administer flood risk, but the government underwrites the exposure.
This relationship can make for awkward policy. For instance, in the wake of Superstorm Sandy—and I'm certain this is not much different elsewhere after a natural disaster—policyholders were upset with the slow pace of settlement or inadequate claims payment, or both. When it comes to accountability, insurers point to the Federal Emergency Management Agency, but policyholder's see the insurers name on the policy and point the finger at them.
This lengthy, aggravating process cannot take place without causing some reputational harm to the company, yet carriers must feel the relationship is profitable enough to stay in it; others may view WYO as a value added service for their clients worth keeping.
Getting past the claims process, the National Flood Insurance Program is suffering a new rankle—increasing customer's rates. If anyone thought the howls from policyholders was loud before, wait until the bills for the actuarially correct flood risk go out. In my little neighborhood on Staten Island some homeowners say they have received increases of not a few hundred, but a few thousand dollars. The community is middle to low-middle class and increases of that sort are just not sustainable.
One answer to lower the premium is to raise the house up above the expected highest flood stage. Where do they get the money for that? Sometimes the only solution is to walk away from their homes because they can't afford the insurance increase or the cost of mitigation.
Hurricane Katrina put NFIP in the hole it's in. Legislators sought to make the program sound and pay for itself by raising rates on people who can't afford it; a very shortsighted answer to a long-term, complex issue. Any insurer can tell Congress that there are only two ways of achieving a financially sound and self-sustaining program: either charge a high premium to a small group of exposures or increase the pool of insureds and make the premium affordable to all.
Some in Congress believe the ultimate answer is to abandon flood insurance altogether to the private sector. That is a fool's dream. Abandonment does not miraculously create a market and the need for a viable solution is growing more urgent.
The reality of global warming is becoming more evident; the threat of flood is on the rise, which is creating less incentive for carriers to accept a risk they never wanted to insure. Carriers will not touch flood for the same reason they stay away from earthquake in California—they can't afford unsustainable losses.
Government is not getting out of the catastrophe business—that is what the people expect government to provide for. Insurers are not going to accept a risk they cannot adequately price and no one can afford to buy. However, catastrophe needs to be a shared risk—shared by government, industry and the people alike.
The answer? Create an all-risk catastrophe policy and mandate every homeowner be involved. This is not a new suggestion, but to be fair and to succeed there must be a shared burden of risk in a public-private partnership.
Under the plan, insurers share the primary risk and the government acts as reinsurer. Insurers would pay premium to a catastrophe fund. We get rid of flood insurance, the Terrorism Risk and Insurance Act, earthquake pools, Citizens and end some of the politicization of disaster because Congress would not need to appropriate relief funds after each event. Because homeowners and renters face exposure to catastrophic loss they would all have to pay for catastrophe risk coverage.
There will be plenty of philosophical opposition to this plan, but what we have today isn't working efficiently or effectively. Maybe it's time to try something radical—or should the word be, “sensible.”
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