Wednesday, August 30, 2017

After 'Harvey' , Demise Of Flood Insurance Closer Than You Think

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Scene of flooded homes just outside Houston after Harvey Struck.

Few people may know, but the last bastion of insurance for protection against floods ends on September 30th. On that date, according to a WSJ article yesterday ('New Dangers For Flood Insurance', p A5), the National Flood Insurance Program (NFIP) - created 50 years ago - is scheduled to expire.  Indeed, it "has just $5.8 billion left it can borrow from the Treasury to meet new claims, according to January figures reported to congress".  Many citizens in flood prone areas buy these government policies - from the NFIP- through private insurers which are then compensated for that service.

The program itself was created  because no private insurer was willing to risk having to pay out for catastrophic flood losses.  This was after the Great Mississippi River Flood of 1927.  As for the NFIP, it could be inundated with billions of dollars in new claims in the wake of Harvey's colossal rainfall - which is still adding up.

The question for lawmakers now is whether to designate a more comprehensive fix to return the NFIP to solvency, or merely attempt a temporary renewal.  According to Sen. Bill Cassidy (R, La.) quoted in the article:

"From a public policy perspective, Hurricane Harvey reinforces the narrative of why the national flood insurance program is so important and needs to be addressed."

Financially speaking the program is in trouble and insolvent. It already has a debt of nearly $25 billion from earlier climate disaster, much of it from Hurricane Katrina in 2005, then Superstorm Sandy in 2012.

The WSJ piece notes that it will "take days if not months, for claims to emerge from Hurricane Harvey".   Also, more than 200,000 homes could be at risk along the TX coast, this from information and analytics firm Core-Logic .  Noteworthy also is that in 30 Texas counties there are nearly 450,000 policies covering $125 billion in insured value. More than half that value is in heavily populated Harris County.

Another aspect hitherto unmentioned  is that a new Texas law goes into effect Friday which may toss all hopes of decent insurance payouts into the crapper. This law- House Bill 1774 - will make it harder for Texans to receive insurance payments.  According to a WSJ article yesterday  ('Harvey Intensifies Debate On Texas Law That Begins Friday', p. A4):

"the new law applies to a variety of property damage involving 'forces of nature' such as lightning, hail, rainstorms, flood, wind, snowstorms, tornadoes, wildfires - or hurricanes".  Adding:

"The goal is to cut down on excessive lawsuits, many related to hail storms"


"The new law shrinks the penalty interest rate insurance companies must pay out if they make late payments to Texans"

That rate is currently around 18 percent but drops to ten percent by Friday.

It is clear the bill is business friendly and Houstonians and others may find to their detriment how adversely it affects them if they don't file initial insurance paperwork by Friday.

Apart from the Texas bill, make no mistake that lawmakers will be under pressure when they return to Washington next week to extend the NFIP after the flooding disaster witnessed in Texas and now Louisiana.  The urgency is all the more evident given the program only has $1.7 billion to p[at claims according to the Federal Emergency Management Agency which manages the program.

According to another WSJ piece ('Lawmakers Facing Financial Challenges', Aug. 30, p. A3):

"Congress will likely have to raise the program's borrowing authority should claims exceed the current cap.

This is a contentious issue indeed given it comes close to when the debt ceiling needs to be raised (with many conservatives against it) and also many of the same ilk have opposed federal aid after superstorm Sandy slammed the East coast in 2012.  Houston businesses are also likely to take a colossal hit, given the NFIP only covers a relatively small fraction of total losses. In one case cited in the Journal from a Houston business owner's losses in April floods last year, the damage inflicted exceeded the coverage maximum for most of the owner's buildings. The $500,000 maximum for equipment fell short by $200,000 alone.  This is a story bound to be repeated this time,

Will tens of thousands of Texans be left high and dry financially after Sept. 30th? We will have to wait and see, but the indicators aren't very encouraging.

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