Washington's Costly Beach House Bailout
On Thursday, the House will vote on a new bill which could turn the government into an insurer for just about every hurricane-prone house in the country.
Just about anyone can find a reason to hate the “Multi-Peril Insurance Act” that the House of Representatives will vote on this week. The bill, which would turn the federal government into an insurer for just about every hurricane-prone house in the country, is a beach house bailout with enormous costs and no real benefits. Quite simply, it can’t work and would do enormous environmental damage. But it still has a chance of passing.
Some background first: Rep. Gene Taylor, the law’s chief sponsor, lost his house in the 2005 hurricane season and has been on a crusade to change the insurance system ever since. The way he tells it, insurance companies use flood coverage (a government program since 1968) to avoid paying wind claims when both wind and water damage a building. Since many people neglect to purchase flood coverage, furthermore, some homeowners’ who suffer total losses end up with nothing. Thus, he wants the federal government to cover both water and wind through the existing National Flood Insurance Program and thereby remove private industry from any substantial role in insuring against hurricane prone properties. His bill, furthermore, contains lots of reassuring language that seems to make the wind insurance program self-sustaining.
As good as this may sound, it can’t possibly work. The private market currently provides wind insurance quite effectively to just about everyone. Not surprisingly, people who live right on beaches (most of them well off), pay the most. The system works right now because, through global markets, the risk of windstorms in the United States is already pooled with windstorms in France, industrial accidents in Canada, and cyclones in Australia. Since these events almost never happen at the same time, insurers can profit on one type of coverage even while paying out a massive claim on another. By limiting coverage to the United States alone, a federal wind insurance mechanism would not benefit from this risk diversification. As a result, it will have to charge more than the private sector does if it hoped to break even. In order to sell coverage, it would have to under-price the private sector and thereby saddle taxpayers with enormous liabilities. The National Flood Insurance Program, which Taylor wants to build on, indeed, already owes the Treasury about $19 billion and has no way to pay it back. A wind program would make its fiscal situation worse.
Adding wind to the National Flood Insurance Program would hurt the environment as well. By subsidizing wind coverage for many of the most hazard prone properties in the country, government-run wind insurance would encourage enormous amounts of development in places where it otherwise wouldn’t happen. Millions of acres of wetlands, wild coasts, and swamps would be destroyed.
As a result of its devastating environmental and fiscal impacts, the law’s opponents run the political gamut. Environmental groups like the Sierra Club, National Wildlife Federation, and American Rivers hate it because the insurance subsidies it provides would encourage development in currently wild areas. Right-of-center groups like Americans for Prosperity and Americans for Tax Reform also oppose it because it will impose such large liabilities on taxpayers. It’s also just bad policy. Even though Barak Obama supported similar legislation when he was in the Senate, the Obama administration has come out against the bill.
Despite the “strange bedfellows” opposing the law and its obvious flaws, the bill has a chance of passing. It easily passed out of committee and passed the House in a slightly different form in 2007. (It failed in the Senate.)
The bill’s dim chances for Senate passage, however, don’t mean that it’s a dead issue. To begin with, the flood/wind divide--“concurrent causation” in industry jargon--that Taylor has identified is a real problem that deserves attention although not nearly as widespread as he implies. (About 95 percent of claims involving both flood and wind damage get resolved within 6 months.) Furthermore, a single major hurricane could leave both House and Senate trying to “do something” and give momentum to the bill.
Quite simply, Rep. Taylor’s bill is a bad deal for taxpayers and the environment. Concerted citizen efforts—including calls to members of Congress—could tip the balance. The vote will likely take place on Thursday. There’s no time to waste.