Saturday, May 30, 2009

National Flood Insurance: a National Disaster

{This posting was published in the San Angelo Standard-Times Thursday, May 28. It was written some time before, but the S-T has first publication rights.}

Have you noticed that every hurricane/flood season sets new records for property damage? No, it is not due to global warming and stronger storms, nor are the Mississippi and Missouri Rivers rising higher than anticipated. The inevitable Law of Unintended Consequences has come home to roost. I recall Biblical advice that one should not “build thy house on shifting sand”. We now encourage and insure people to pursue precisely that activity at our neighbors' expense.

When I was a sprout living in east Carolina, the Outer Banks was a cheap&easy vacation. Surf casting
for flounder, the Wright Bros. Tower at Kitty Hawk, shell hunting at dawn, for a twelve-year old kid, it was heaven on earth. A few houses on stilts on the beach, but not many. Beachfront building was a toy for the wealthy, they built at their own risk

Mother Nature has no pity, she favors neither rich, poor, or ethnic concerns, the wind blows where it will and the rain falls where it does. I place in play the idea that the primary cause of ever- increasing property damage is the National Flood Insurance Program itself.

I go to a 2005 Congressional Research Service study. It runs 45 pages I will try to render readable. The CRS paper uses the term “actuarial” several times but then guts the word of anything meaningful. Page 14, “there is no individual risk analysis to determine the likelihood of a future loss, and individual loss experience is not used as a rating criterion. The sole criterion is that the insured property is located in a community that participates in NFIP”. If that bureaucratese escapes you, try this hypothetical from a car insurance company; “We will cheerfully insure a repeat DWI offender at the same rate as a person with a perfect driving record, so long as the state mandates all drivers be in the insurance pool”. I don't think we will hear that from the GEICO gekko anytime soon.

Under the original language from 1968, amended 4 times since, NFIP is authorized to borrow from the Treasury $1.5 Billion each year, but must repay that with interest. NFIP has lost money every year since its creation, that's why we keep amending it. NFIP does repay with interest, I've checked the financials. So the question arises, how can they do that when they routinely pay out more in losses than they take in as premiums?

Not a problem. Unlike free market insurers who have to attract customers of their free will, NFIP is legally empowered to tell you that you are a customer by designating your property as a “flood zone”. By roping in mandated “customers”, NFIP forces homeowners who haven't see flood water since Noah cruised by to contribute to the risk pool whether they are at any real risk or not.

Go to the city website, this is top of the home page. There are a multitude of maps, very confusing, but I commend to your attention the map 340. NFIP claims it uses hydrologic, and elevation based data to draw its lines. On map 340, one sees a line running along Cauley Ln to Grape Creek Rd, then angling 45 degrees northeast towards FM 2105. Just to be sure, I cruised that area this weekend. There is not a 10 foot high berm on the south side of Cauley, no elevation difference, no rational distinction between the northside homeowner and the one on the south side of the street except; NFIP wants income from the north side. I guess they are saving the southside for later.

I must emphasize, a genuine hydrologic map will have the same curving contours as any topographic map. If you see a straight line, such as Cauley Ln. or a county line, unless there is a man-made dam under that line, somebody is blowing smoke up your skirt.

The CRS study I mentioned addresses Repetitive Loss Problem. NFIP has 4.5 million policy payers. RLPs, people who really live in God's honest flood plains are 17% of policy holders. They account for over 30% of payouts. A real insurance company would have booted out a lot of RLPs, maybe suggested they should rebuild elsewhere on higher ground. Under the Substantial Damage rule of NFIP, theRLP property owner is not even required to upgrade to local code compliance unless the payout is over 50% of the property value We subsidize propertries that have been rebuilt four and five times on the same vulnerable site! Why should they learn from mistakes, we write the checks.

Insurance, properly run, performs two functions. The one we are all familiar with is pooling risk and paying claims when unfortunate events impact us. The second, equally important function is actuarially based risk avoidance. Go back to my early days on the Outer Banks.

If you had the money and wanted to build a house-on-stilts on the beach, fine it's a free world. No one is going to underwrite the mortgage without insuring the collateral, and since you are building where devastating storms can be anticipated every 15-20 years, no rational insurer will write you a policy for much less than the cost of the insured property. People with money to spare did build anyway, but they did so at their own risk, and took the loss when the inevitable hurricane came through.There were a lot fewer houses-on-stilts, today it's wall to wall, houses waiting to be knocked down by the next storm and paid for by me and thee.

Under the tender rules of NFIP, people can get insurance, subsidized by the premiums paid by the folk on Cauley Ln. who have virtually zero risk of damage. The Outer Banks, or Texas' own barrier islands, or river front property on the banks of the mighty Mississip are built up beyond anything rational because idiots can get insurance we help pay for to cover their foreseeable, inevitable losses.

Unfortunately, there isn't much we can do locally except pay up. I haven't heard our Congresscritter Conaway say anything on this topic. There is a “public comment” window, but given the history, I doubt it will accomplish much save “venting”. Thanks for allowing me to “vent”.

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