Once again, instead of walking the talk of jobs and economic recovery, government is about to stumble – tripped, this time, by lies about the need to enable the purchase of multiperil coverage and optional separate windstorm coverage under the NFIP as proposed in HR 1264.
The truth about the need for HR 1264 can be found on the Congressman’s website and is summarized in his recent “Dear Colleague” letter below”
You may have received statements or letters in opposition to H.R. 1264, the Multiple Peril Insurance Act. These statements all appear to be based on the same false assumptions that the private insurance industry is meeting the demand in coastal areas and that insurance premiums in coastal areas are appropriately priced. These statements are not supported by the facts or the economics of the hurricane insurance market.
There is no functioning, competitive market for property insurance in coastal areas. Millions of homeowners and business owners have inelastic demand, which means that they are required by their mortgages or lenders to buy windstorm coverage. However, private insurance companies are not required to sell it to them, and companies have stopped writing new coverage in most coastal markets, even though all of the Gulf states and most of the Atlantic states allow insurers to charge premiums that are several times higher than what they expect to pay in claims.
Since Katrina, insurance companies have abandoned coastal communities, creating an urgent insurance crisis along the Gulf Coast and Atlantic . State-sponsored high-risk pools have been forced to absorb more than $345 billion dollars of new hurricane exposure but are not able to build up enough reserves to cover a major hurricane that would result in a large volume of claims at one time.
The state insurance pools also have inelastic demand. Because they have not been able to build up the reserves to cover a major hurricane, the state pools are forced to buy billions of dollars of reinsurance coverage every year. The reinsurance industry also is not a competitive market, so the state pools are forced to pay premiums that are many times more than the expected claims. In the failed coastal insurance market and the global insurance market, there is no choice, no transparency, and therefore, no free market pricing or efficiency. As a result, most of the resulting insurance premiums each year are paying generous returns for reinsurance investors, but not building up reserves to pay future insurance claims.
Research by Dr. Howard Kunreuther and Dr. Erwann Michel-Kerjan at the Wharton Risk Management Center at the University of Pennsylvania found that catastrophe insurance premiums in the highest risk areas are as much as ten times higher than the expected claims losses. (Managing Large-Scale Risks in a New Era of Catastrophes, Wharton Risk Management Center, University of Pennsylvania, 2008. p. 141).
The table below shows what happened to members of the Hancock County Chamber of Commerce after Hurricane Katrina when their insurance companies dropped their policies and dumped them into the Mississippi Wind Pool. The wind pool suddenly took on several billions of dollars of insurance liability without the reserves to cover that exposure, so the wind pool had no choice but to pay outrageous prices for reinsurance coverage.
Economist Lloyd Dixon of the RAND Corporation has explained the advantage of a government insurance program in high-risk areas:
“Government is not subject to the private-sector factors that produce large swings in premiums around expected loss in private insurance markets. Thus, compared with the private sector, government should be able to set insurance prices closer to expected loss for hurricanes and other catastrophic risks, and keep those prices closer to expected loss over time.
(Lloyd Dixon, James Macdonald, and Julie Zissimopoulos, Coastal Wind Insurance in the Gulf States, RAND Gulf States Policy Institute, 2007, p. 8).
The federal government would be able to establish a hurricane insurance program that would spread risk geographically along the Gulf and Atlantic states. The federal program would be able to set rates based on the risk and create a stable insurance market. It would be very easy for the new program to determine wind risk and set wind premiums, because the state governments, the building industry, and the insurance industry have already done most of the work for them. For example, this is how the Mississippi Wind Pool sets its rates.
The Mississippi Wind Pool is the wind insurer of last resort for the three counties on the Gulf of Mexico and the three counties directly above those. The wind pool divides the territory into four rate zones:
Zone A – Between the Gulf of Mexico and the CSX Railroad
Zone B – Between the CSX Railroad and Interstate-10
Zone C – From I-10 north to the county lines
Zone D – The second tier of counties above the coastal counties
Within each zone, the wind pool board establishes risk-based rates for frame construction and masonry construction with several policy options for higher or lower deductibles. The wind pool also has a program that grants premium reductions for structures that meet a high wind-load mitigation standard. The zones, the rates, and the mitigation credits are based on plenty of available data from the American Society of Civil Engineers, the International Code Council, and many other interested parties who study wind risk and building performance.
Other states with wind pools have established wind risk zones in similar manner, often using any easily identifiable and unambiguous feature to divide the zones. The Texas wind pool uses the Intracoastal Canal to divide the highest risk zone from the second zone.
Wind risk is much easier to determine and to map than is flood risk. The probability and severity of hurricane winds is much easier to predict than flood risk based on assumptions about levee systems, on predictions about the severity of storm surge. Wind risk also does not constantly change with any change in topography as flood risk does.
Member of Congress