Flood damage in Houston costs whom?
Via New York Times comes this information on flood insurance, which I believe is the predominate cause of storm damage in the Houston area and beyond:
Private homeowners’ policies generally cover wind damage and, in certain cases, water damage from storm surges. But for almost half a century, all other homeowners’ flood coverage has been underwritten by the National Flood Insurance Program, a federal program that itself faces financial uncertainty.
Flooding has dealt the hurricane’s biggest blow. And in areas where it is prudent — or even obligatory — to buy it, having flood coverage is the exception rather than the norm.
…
People without coverage will have to apply for grants or low-cost loans from other branches of the federal government, said Loretta Worters, a spokeswoman for the Insurance Information Institute. That means delays in receiving funds, if such requests are even approved.
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The National Flood Insurance Program was created in 1968, after most private insurance companies stopped writing homeowners’ flood coverage because they could not charge premiums high enough to cover the potentially catastrophic costs. (In addition to wind and limited storm-surge damage, private insurers cover vehicles caught in flooding.)
The 49-year-old program is now run by FEMA. Its coverage has caps: $250,000 for a house and $100,000 for its contents, and $500,000 apiece for a business building and its contents. Larger companies can still buy flood coverage through commercial insurers.
If you’ve experienced flood damage, you can contact an adjuster for flood damage to help with claims.
In theory, those without flood insurance are “self-insured”, i.e., the costs of repair/replacement should be borne by the homeowner and/or the mortgage lender (the return of jingle mail?). In practice, there will be disaster funds allocated from Congress to Houston residents.
I have often thought that medical insurance caused medical bills, and car insurance causes repair bills
but this is the first time i heard that flood insurance causes floods.
but i was wondering if the people in texas were any closer to believing in global warming. or the usefulness of the federal government.
Coberly, I think you know this, and if not, I’m certain you’ll understand that it’s not the insurance itself, rather it’s the availability of flood insurance below actuarially sound prices that fails to discourage building in flood prone areas.
It is the failure of township, county, state, and federal government legislating the standards required to build near or in areas which are prone to be flooded during severe or normal weather resulting from annual melts or rain. Trump just finished reversing an Obama executive order two weeks prior to Harvey requiring any development using federal funding (which is about 100%) to follow 100 year and 500 year guidelines in building in such area regardless of what local ordinances are in place. For every $dollar spent in mitigation, it was expected to save $4 is savings. Trump prefers to fund developers at the expense of taxpayers.
Insurance companies do not make money off of premiums, they make it from investing those premiums. They did take a beating from prior hurricanes flooding low lying areas.
The more fundamental problem is that floods tend to have at least regional impact, and violate the law of large numbers that insurance requires. (Many pay premiums, few collect from the insurance). In this sense it is like earthquake insurance, Going back a bit, assume you issued flood insurance for the St Louis area during the floods earlier this year and last year, If you were an insurance company you went broke. For regional and larger events the only insurer is realistically the population as a whole, i.e. the government as it can print money as needed. No commercial insurer could offer such coverage and stay solvent after a big flood.
M.Jed
don’t be too sure I know anything. but very interested in your comment and Run’s and Lyle’s. I think you are all correct, but
Lyle,
not so sure that even the government can just print money to pay for everything.
nor am i sure that people can find places to build outside of flood susceptible areas, and it is likely to get worse
two ways to read “many pay… few collect” first is normal insurance: way it’s spozed to work. second is the fine print by which insurance companies find out they don’t have to pay after all.
“we” (the government) could provide the insurance, but “we” (all of us) would end up paying for it, even if the government just printed the money.
up to a point i am willing to take that bargain: Social Security is pretty much each of us gets back what we paid in adjusted for the time value of money. Medical insurance is a little different in that some people get sicker than others… or their doctors do. again, up to a point that’s what “insurance” is. we pay “in case.” but at some point when medical costs for the sickest get so high the less sick start to resent the burden. hell, they can’t even understand the point of paying a higher rate while you are young and healthy in order to have paid in advance for when you are old, sick, and have no income.
and flood insurance: like car insurance, i already resent paying for people who build mansions on the coast, or drive expensive sheet metal sculpture around parking lots or other places they bang into things. I have some sympathy for the poor people who are forced to live in bayou country… or down in cancer alley… but i see no hope at this point that either the politicians or the citizens are smart enough to figure out the answer.
Insurance companies do not make money off of premiums, they make it from investing those premiums.
At an industry level, this is true, but at a more micro level it greatly depends on the duration of the liabilities funded by insurance premiums. Property risks, like flood, wind, theft, and fire for homeowners, or personal auto collision, are “short-tail” risks, so the insurers don’t have the benefit of time value and can’t invest their funds in longer-dated securities. Casualty risks such as Workers’ Comp or Professional Lines Liability have much longer-dated claims durations and typically the Casualty sub-industry has lost money on claims but made up for by higher yielding investments (though the industry in aggregate fails to achieve its opportunity cost of capital). The types of risks assumed also dictate the way the balance sheets are structured beyond the investment portfolio, such as how much financial leverage the company assumes and the amount of premiums per dollar of capital supporting the company.
As an example, Progressive Insurance, which up until a few years ago when they acquired a Homeowners’ subsidiary, wrote predominantly personal auto insurance (with a little bit of commercial auto, motorcycles, boats, etc.), had a company mantra to grow as quickly as possible while maintaining a 4% underwriting profit margin.
To change building behavior, you wouldn’t need much in the way of zoning or regulation beyond mandating the purchase of private flood insurance at actuarially sound prices and drawing a line in the sand limiting bailouts.
Jed:
This kind of gets into much of what I was saying and explains it more in depth like you were: How Property/Casualty Insurance Companies Invest Premium Dollars Having worked on a Planning Commission for a local municipality it is important to have setbacks from rivers, wetlands, and other environmentally impacted areas. There is nothing insurance would do for these areas which increase in importance as communities rise up around them. Private insurance is not going to change the way structures are built or way they are built. It hs to be done at a local, state, and federal level. With his reversal of Obama’s executive order, Trump just shifted the burden back to taxpayers because of his white supremacist ideology.
Jed
I am not sure that would be all it would take. Sure, it would be “rational.” but people are going to build where they can find the land. And if they can’t afford the insurance, they’ll cross their fingers and build anyway.
Actually in the case of floods you could work on educating consumers on how to tell a flood prone area. Interestingly a lot of the homes being flooded in Houston are higher end homes in newer developments many with Levees. A simple rule which flies in the face of the way real estate is often priced is the nearer to the river the more likley to flood. (and assume that levees fail if nothing else because insufficient money was spent on maintenance. So interestingly in some parts of the Houston disaster the levee as comfort blanket worked just like in NO to lull folks into a false sense of security (primarily along the Brazos river in Fort Bend County)
Lyle
if i were a politician i’d call for all land sales to be accompanied by a list of known risks including legal restrictions. “due dilligence” only applies to professionals. the people know nothing.
and i would be opposed by those who profit from the people who know nothing. but, yes, certainly, people who build mansions in flood zones and expect to be rescued and compensated by the taxpayer are often the very same people who take advantage of suckers.