Multi-Peril Insurance: Dead for the Year?

Last Thursday, the National Underwriter contained a story of the unusual coalition that had developed in opposition to HR 3121. Matt Brady reports:

In a case of politics making strange bedfellows, J. Robert Hunter of the Consumer Federation of America and the Reinsurance Association of America have joined to oppose legislation expanding the National Flood Insurance Program.

Those that closely follow insurance issues know Mr. Hunter runs insurance issues for the Consumer Federation of America a non profit group composed of other consumer oriented non profits that speak with a single voice on issues they deem important. In this case the debate on HR 3121 and the CFA’s opposition derives from the intersection of environmentalism and insurance theory.

The basis for his opposition to plans to expand the NFIP, Mr. Hunter said, is that while it may sound like something that could help consumers, he believed it would instead likely only aid developers looking to build along the coast.

“I don’t think it’s wise to subsidize” coverage in high risk areas,” he said, adding that proposals such as windstorm coverage expansion “encourages unwise construction” in high wind risk, high flood risk areas.

Mr. Hunter said he was not opposed to the idea of a flood insurance subsidy, but he said it should be something targeted to help consumers and be focused on scaling down the number of people living in flood-prone areas. Such a system, he said, could be based on the policyholder’s income, and should only be applied to existing structures.

Obviously Mr Hunter’s opposition was a blow to Representative Taylor’s bill.  Normally he opposes the insurance industry in Congress in areas like providing a federal backstop for terrorism coverage as he did last year with no success. Insurers were no doubt delighted to have him come on board to front the opposition against the multi peril concept.

This is not the first time Rep Taylor’s bill has been declared dead, however. Before what became known as HR 3121 passed the House of Representatives, Sam Friedman declared the concept “Dead in the Water” in his his highly informative blog due to opposition from the White House. Ultimately President Bush’s announced opposition did not deter the House of Representatives from doing what they thought was right in passing HR 3121.  Ironically, in his blog entry related to Thursday’s news story, Mr Friedman sounded a more cautious note on the political prospects of HR 3121.

The battle to keep wind out of NFIP won’t be easy. Powerhouse Sen. Hillary Clinton, the New Yorker looking to win the Democratic nomination for the White House, is solidly behind the bill–in fact, she introduced the Senate’s version of the legislation passed by the House, and is lobbying Sen. Chris Dodd, who chairs the Senate Banking Committee, to support addition of wind coverage.

That’s going to be an uphill battle, as Sen. Dodd–the Connecticut Democrat known for his support of the Hartford-based insurance community–has already sent different legislation to the floor that does not include coverage for wind risks……

Sen. Clinton has good reason to add wind coverage to the NFIP, given the increasingly hard time facing her constituents on Long Island when trying to get affordable homeowners coverage, with many private carriers pulling back and hiking rates in fear of a monster hurricane storming up the East Coast sooner rather than later. As a Brooklynite living a mile or so from the ocean, I can even sympathize.

Today, we wake to this Anita Lee story at the Sun Herald which I take as a tacit admission from Rep Taylor’s office of the political realities we face in the current Congress. With Mr. Hunter as the public face of the opposition, reinsurers are free and clear to make the argument that the NFIP is “more than an insurance issue.” However, the opposition also guarantees that problems with NFIP may very well not be fixed for another year. Indeed the exact type of development Mr Hunter decries in his opposition to HR 3121 is guaranteed to continue absent comprehensive solutions such as mandated building codes, actuarially sound premiums and increased federal oversight also die until next year.  It may very well take another major metropolitan area being hit hard by a Hurricane before Congress sees the wisdom in allowing the resident’s of our coastlines to fully insure their disaster risks. Here is the Anita Lee story:

The Senate is unlikely to add wind insurance this year to a National Flood Insurance Program riddled with problems.

J. Robert Hunter, director of the Consumer Federation of America and an advocate of insurance reform, thinks a wind amendment to the National Flood Insurance Reauthorizaion Act will fail for two reasons: It’s an election year, and powerful senators have dug in their heels on both sides of the issue.

Supporters say the amendment is needed because private insurance companies are dropping Gulf and East Coast property insurance coverage for wind damage. Also, supporters say, one policy would end prolonged disputes over whether the cause of hurricane damage is wind or water.

Opponents have strong arguments against adding wind coverage to the NFIP, which has an $18 million deficit.

“It would add massive taxpayer exposure to an already debt-ridden and broken program,” said Jonathan Graffeo, spokesman for the Senate Banking Committee.

The amendment, which passed the House, wasn’t offered in the Senate Banking Committee because it faced death there. U.S. Rep. Gene Taylor, who sponsored the amendment in the House, hopes to meet with ranking committee Republican Sen. Richard Shelby of Alabama. Shelby opposes the bill, although his constituents on the waterfront are seeing their insurance options shrink and costs increase.

Taylor has argued the amendment would require actuarially sound wind-insurance rates, which means charges would be based on risk. The amendment also requires tougher building standards and raises coverage limits.

“You can’t trust the federal government,” Hunter said. “Just because the law says it’s going to be actuarially sound doesn’t mean it’s going to happen.”

Hunter, a former Texas insurance commissioner, worked for the National Flood Insurance Program from 1970 to 1980, serving as director for four of those years.

“I loved the program,” Hunter said. “I thought it was a tremendously good idea, but of course it hasn’t worked.”

Flood rates are heavily subsidized because rate maps are outdated and Congress has resisted increases.

After a hurricane, insurance companies adjust flood claims along with their own, creating what the government has determined to be an “inherent conflict.” (of interest). Also, FEMA paid operating costs to insurance companies of more than one-third to almost two-thirds of total NFIP premiums from 2004 to 2006, the government found.

Hunter asked, “You have a program that’s wasting money, that doesn’t work, that has subsidies from the taxpayers and you want to add more to it?”

Actually Mr Hunter we want to fix it rather than leave it broken. The politics at work will assure this issues remains with us into the next congress.

5 thoughts on “Multi-Peril Insurance: Dead for the Year?”

  1. What Mr. Hunter is saying is exactly what the rest of the experts have said about such a venture. There is no way congress is going to make a program actuarily sound because it would make the premiums so high the constituents would balk. Of course all the liberal bleeding hearts like Taylor have no problems with it because they are used to the wealth redistribution model their party is famous for. They just want a government fix to a problem that the markets and the private sector can handle. For all the screaming about State Farm, Allstate, Nationwide, etc, if people dont like the reputation the company has, they dont HAVE TO PURCHASE THEIR PRODUCT. That is free market economics 101. This is unlike the flood fiasco which says if you live in a high risk zone you MUST BUY THE GOVERNMENTS PRODUCT or go without a loan. Typical socialism.

  2. Welcome to slabbed Mr. Mass-a-Mess. You bring up a good point but I won’t leave the inaccuracies in your reply unchallenged, such as Rep Taylor being a bleeding heart liberal. In fact he is more conservative than many Republicans.

    Also the problem is not the private marketplace, rather there is no marketplace for wind insurance for us in coastal Mississippi and places like Florida, Texas and Louisiana, only state sponsored pools that are insurers of last resort.

    I wish it were as simple as not buying insurance but for the overwhelming majority of the residents of this country self insuring is not an option, most have mortgages that require the loan collateral be insured. This is finance 101.

    Also to pretend the government is not already involved is also not reality. Billions of dollars of disaster relief has flowed here in the aftermath of Katrina, an expense that could have been prepaid and avoided had the multi peril concept been in place on 8-29-05.

    Another factor that comes into play is the possibility that lack of federal oversight may have allowed private insurers to dump their wind claims on the Flood program causing a large part of the NFIP deficit. That is hardly the fault of the people down here who were fully insured pre Katrina for both wind and flood.

    The point you bring up that I

  3. You are quite on target about Rep. Taylor’s conservative tendencies beign stronger than a lot of sitting republicans (almost more conservative than our government-enlarging president,) my “slant” on him was bascially at the “Let government handle it all for you” brand of liberalism. Your remark about a lack of marketplace is proof-positive about what I have said regarding the mis-information being spread by many industry bashers. If the insurance market is so lucrative for these mammoth companies, why arent they asking for MORE of it instead of pulling away from it like they have been doing of late? Mr Taylor and the rest of the bashers keep pointing out the “billions” made by the industry over the years but refuse to tell the story in its complete form. (As you may guess, I am part of the industry up here and watch the mess there without a totally unbiased eye.) The question a lot of insurers want to know is if we are going to be bashed for making money on our investments during good years, will the government let us avoid paying claims when the market is down? I dont think anyone, anywhere, has been able to show that the insurers have “made” money on the gulf coast. The last figures I have seen in the press reflect that the big guy down there (State Farm) has paid out more under their homeowners policy (not flood,) for Katrina than has been paid in premiums in the state since they started selling policies there.

    I wont bore you with sophistry about the windwater debate and the whole “dumping” story. So far the appeals courts, the GAO, Jim Hood, et al have failed to find -any- proof of that sensationalistic claim. It is good for headlines and constituents but has whithered fairly quickly in the light of full investigation.

    I and many of the other insurance professionals I deal with disagree with Mr. Hunter and feel that YES this is IDEALLY the type of situation the govt. should step into and take care of…IF THEY WILL DO IT FAIRLY (read that as ACTUARILY sound) and not strap my state or others for the proper premium. Thanks for the forum.

  4. We all have biases Mr Mass-a-mess. I think the key is keeping ourselves open to new information, even those that differ from our beliefs. For example Rep Taylor’s criticisms of the insurance industry are borne of the experiences both he and his constituents experienced post Katrina with their insurers, the main complaint being no acknowledgement of damage due to wind in the very area the wind was most strong near the coastline and the resulting conflict between the anti concurrent clause and the NFIP regulations which required a proper apportionment of damage in multi peril situations. These criticisms do not rise to the level of bashing IMO as they are valid.

    The wind water debate is also not as clear cut as you suggest. For instance the fact the GAO did not conclude as to pervasiveness of the claims dumping allegations results from the fact they had no data with which to reach any conclusions. In essence FEMA purposely blinded itself by not collecting data which is hardly good stewardship of taxpayer money. Cases like Weiss in Louisiana which involved different charges on the same house for items like sheetrock depending on whom was picking up the tab illustrate the problem of claims dumping did happen we just don’t know to what extent.

    I hail from the world of for profit business so I am sympathetic to your point about businesses being demonized for achieving their purpose of making a return for their owners. In my own case I have publicly disclosed that I was treated very well by my insurer as were the vast majority of the wind claimants down here after Katrina. I submit insurers are built (for lack of a better word) to handle roof claims and the like. I also submit that gutting wind policies with policy language like the anti concurrent clause did not serve the interests of either the insurers or the insureds.

    I’ll also add I work with many different insurance professionals in my line of work and as a group I find they exhibit a high degree of personal integrity and professionalism in how they conduct themselves both personally and in the business world. While the wind water litigation is of great interest here, I view the problems we experience with insurance to be more of the public policy variety where reasonable people can disagree

    In Commissioner Chaney’s insurance forum in early March one of the panelists, Dr Edwin Duett from Mississippi State University, made the point that we have to stop talking past one another and find solutions to the very real problems laid bare by the wind and waters of Hurricane Katrina. I hope the ongoing dialogue among our political leaders and in places like this blog result in solutions that all of us can live with. Thank you for taking the time to post your thoughts.


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