June 29, 2006

Flood Insurance Managers Facing Inconvenient Truth

Insurance Managers face the inconvenient truth that global warming will continue driving increased rainfall in interior of the Eastern United States, as well as stronger and more frequent tropical windstorms hitting coastal regions. National Resources Defense Council - Global Warming Fact Sheet See also the EPA's fact sheet on global warming impact on North America.

The National Flood Insurance Program is already financially exhausted due to the combination of Hurricane Katrina and Congressional decisions to subsidize coastal and floodplain development by providing below-cost insurance guaranteed by the taxpayer. "NFIP current financial condition unsustainable: CBO", Unintended Consequences (June 6, 2006). See also "GAO re Katrina: 1993 Andrew Advice Still Holds; NFIP 'essentially bankrupt'", Unintended Consequences March 8, 2006.

Congress is now considering program changes that will raise premiums, increase deductibles and make coastal development and post-Katrina rebuilding more expensive. According to the Washington Post, "The House voted 416-4 Tuesday [June 27) to phase out subsidies on some vacation homes and commercial property and raise premiums at a faster rate. The bill also increases the amount of coverage a property owner can buy and boosts fines for mortgage lenders who don't tell customers they have to buy flood insurance."

Back in the 1920's, it was not coastal storms that caused the biggest natural disaster ever experienced by the United States. It was an unrelenting series of interior rainstorms that persisted month after month, saturating the Mississippi River basin and finally overtopping levees, sending an inland sea throughout the Delta. This led to uncounted deaths, mostly of rural poor blacks, untold human misery and massive relocation of the population of the lower Delta to northern cities. John M. Barry's book "Rising Tide: The Great Mississippi Flood of 1927 and How It Changed America (1998) documents this nation-changing event. See New Orleans lawyer-blogger Ernest Svenson'scomparison of the Great Flood of 1927 to Katrina in the "Ernie the Attorney"

No one can say for sure that the inland storms and flooding that have hit the Northeast in the last few months (New England in the Fall of 2005 and the record-breaking MD-PA-NJ-NY inland rainstorm of June 2006) are caused by global warming. The consensus of climatologists is that the likelihood of such climate chaos is increased by rising ocean temperatures and the resulting increase in atmospheric moisture.

Insurance managers and legislatures must consider that the actuarial costs of windstorm and flood insurance are likely to increase, not diminish, that the recent disasters may not be "outliers" but rather fore-runners of worse to come. They must decide whether to price private and government programs realistically or to cave to market and political forces to take the cheap solution.

Private managers have the discipline of the private reinsurance market and shareholders to keep them rational. We already are seeing the effects of that as private windstorm insurance becomes more expensive and harder to get, with fewer providers.

Government programs have only the discipline of the ballot box, which is dependent on the electorate. We will see if the political will exists to accept the inconvenient truth that subsidizing those who build on sand has longterm unintended consequences.


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Posted by dougsimpson at June 29, 2006 11:56 AM
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