Flood and Wind Insurance Reform in Congress

By Aaron J. Stein
The National Flood Insurance program, administered through FEMA which is in turn part of the Department of Homeland Security, is currently how the vast majority of Long Islanders and people all around the country buy their flood insurance when needed. The idea of the program was that because flood is catastrophic in nature, meaning that it can affect large numbers of people at the same time, that only the taxing power of the federal government was enough to make sure that when the time came to pay huge claims, the money would be there.

The problem is that the rates being charged in the program are not nearly enough to pay the claims, so additional monies have had to be put in over the years by Congress, and those funds basically come out of taxes paid be everybody, not just those in the flood hazard areas. There are some social arguments back and forth about whether that's right or wrong, but after Katrina, it was decided that the program needed to be revised to be 'actuarially sound', meaning that it would collect enough premium dollars to pay the claims, without resorting to general tax revenues or other bailouts. The difference is many billions of dollars, and the answer they have come up with is to include more people in the flood hazard areas and also to increase rates.

But since a couple of the people whose homes were destroyed in Katrina happened to be influential members of Congress, they are not looking to stop there. In trying to judge who was responsible to pay the claims of Katrina, there was a lot of finger-pointing on the part of insurance companies who denied some claims that they felt should have been paid under flood coverage. However since many of the affected residents had been told that the work of the Army Corps of Engineers, in building the levee system, would protect them from flood, they did not carry flood insurance and so were left with no way to rebuild.

What is being proposed is to move windstorm coverage from the private homeowners insurance industry to the government-backed flood insurance program, and price it accordingly. Interestingly, this has the insurance industry up in arms. Although as we know here on Long Island, and particularly as you get farther out on the South Shore of Suffolk County, many insurance companies are shying away from providing policies at all because of the windstorm exposure.

Now this sets up an interesting position for the insurance carriers. On the one hand, they are arguing that wind insurance should NOT be taken out of their hands and put into the Government hands. In general, a founding principle of our country was private ownership, and that the Government should not set itself up as a competitor to private industry. But there are many cases (Medicare, Workers Comp...) where private industry was not up to the task and the government stepped in.

To me, it seems simple enough - if covering losses for hurricanes is a money-losing proposition for insurance companies (which one would have to think it must be if they won't write more coverage) then why would they care if the government took it over? And virtually any argument that could be made for or against the government covering windstorm could be easily turned into the same argument for flood insurance. So which is it? The coverage is too risky and they don't want it, or it's profitable and should be left in private hands? The answers being given by the industry suggest they are trying to play both sides of the fence.

As for me as an agent, I have to say it doesn't really matter. I sell both the government flood insurance as well as home insurance for all kinds of waterfront property. Our job is to deliver, explain, and service the product. So I have no great stake in the outcome here, but I know a snow job when I see one.

Big Changes in Long Island Flood Insurance

By Aaron J. Stein

Hello all, and please accept my apologies for not having written a blog entry in quite some time. But this morning's Newsday article regarding flood insurance had something in it that got me so frustrated that I had to write.

The article is about the re-mapping of flood zones on Long Island by the FEMA, the government agency in charge of the national flood insurance program. They are using new equipment and techniques to reevaluate all the flood maps which may or may not result in people now being required by their bank or mortgage company to carry flood insurance where they may not have been required before.

FEMA is suggesting that some who live near a flood zone are currently outside of it might want to think about purchasing flood insurance now because the price may change dramatically if they are included in a flood zone after the new maps are issued. For instance right now someone who is not in a flood hazard area here on Long Island would pay under $400 for the maximum flood insurance available from the government. If your house is deemed to be in a flood hazard area when the new maps are complete your rate could easily be four to five times higher.

Under FEMA rules, if you have a flood insurance in place and your zone changes you grandfathered in to the old zone for as long as you keep your insurance in force. So if you live close to a flood zone but outside it you might want to think about buying one of the inexpensive policies now. If you end up in a flood zone and your bank requires the coverage, you will be locked into the lower rate. If you remain outside of flood zone under the new maps, you could cancel the policy after a year if you wish. (FEMA will not allow a policy to be canceled in the middle of the year unless you sell your home)

My problem is that in the article there is a quote from County Executive Steve Levy saying that homeowners should be allowed to make their own decision on whether to carry flood insurance or not, as opposed to having that decision made for them by FEMA or their bank. The fact is that we hear every day from people who are only buying flood insurance because their bank is forcing them because of government regulations. They feel that the fact that they've never seen a flood in their home means they will never be flooded. Unfortunately this is not the case and we only need to look at the ongoing problems resulting from hurricane Katrina to see that.

In addition, the idea coming from the County Executive that people should be able to choose which government programs and mandates they participate in and which they choose not to is absurd. If that were the case most people on the South Shore would probably still have cesspools in their backyards except that the government mandated participation in the Southwest Sewer District in order to protect our drinking water in the long run. The same logic is behind a part of our sales tax collections which go to fund open space purchases.

And how about school taxes? I have no children in school anymore. Can I opt out of school taxes because I no longer see the direct benefit to me? I found this to be a very irresponsible statement by the County Executive and contrary to the whole reason for the existence of virtually every government program. It's fine to be a fiscal conservative with the general opinion that government should take the least role possible in people's day-to-day lives. However say that these decisions should all be left to the individual homeowner and rely on them to make the best decision for everybody for the long-term simply does not work and is not valid.