As bailout follows bailout during the ongoing financial crisis, one has to wonder whether magical thinking is in play. Some government subsidy may be appropriate to prime the liquidity pump, but at some point government help becomes government enablement of failure. The government has at its disposal finite resources that come exclusively from taxpayers, and yet the public often thinks in terms of what is "right" rather than what is possible.Such thinking animates belief in rent control and other price manipulations, and it no doubt enters into thinking about health insurance reform. It's easy to be generous when the real costs are out of sight and out of mind, as blogger Megan McArdle notes while making a point about the flexibility of campaign promises:
People say they want national health insurance. They also say they want lower government spending. But confront them with changing their insurance (with which they are, overwhelmingly, satisfied), or cutting Mom's Medicaid, and they change their minds. They will still tell you that they want national health insurance and lower government spending, but, you see, not that way, where "that way" is any feasible way to deliver their stated goal.
What's true of health insurance is true of flood insurance, as I was reminded by this headline about the National Flood Insurance Program (NFIP): "Study: Flood Program Premiums Do Not Adequately Reflect Flood Risk." One has to chuckle. Of course, they don't adequately reflect flood risk, or we wouldn't need the NFIP! The NFIP's defenders might argue that the goal would be to have premiums adequately reflect flood risk without turning a profit, but in fact the program was never that ambitious. As the article states (my emphasis):
While by statute the NFIP was not designed to be actuarially sound, until 2004 the program covered most of its losses with collected premiums and occasional loans from the Treasury that were either repaid or retired by Congress, the GAO noted.
I'm tempted to joke about the possibility of Congress "retiring" my mortgage, but in the current climate I'm afraid I'll be taken seriously. The article goes on to note that only about three quarters of property owners under NFIP are charged premiums commensurate with risk. Moreover, in some cases, NFIP policyholders whose properties that have been re-mapped into riskier flood zones have been allowed to keep their original premium rates.
The article quotes a GAO source saying "policyholders in states with frequent high-loss years are paying the same rates as policyholders with similar properties in states with fewer losses - which means that low-loss states are subsidizing high-loss ones. But then the whole program is designed to make people who don't live in flood zones subsidize those who do. It's not enough that the mere existence of the program encourages people to take the risk of living in flood-prone areas; the program provides actuarially unsound rates to 25 percent of its recipients, according to the article, "in order to encourage participation in the program."
What is the end result of a program for which leakage is a virtue, and in which is designed not only to fail but to expand? The answer must be only one of degree, depending on the vagaries of the weather:
The 2005 hurricanes left the NFIP with an "unprecedented" $17.4 billion deficit, the GAO says in a report recently submitted to the U.S. Senate Committee on Banking, Housing and Urban Affairs.
It is unclear whether the report's title reflects the GAO's leaden wonkishness or a terrifically dry sense of humor, but it is called "FEMAs Rate-Setting Process Warrants Attention." It will be interesting to see what kind of attention it gets when current authorization for the NFIP expires on March 6, 2009.It is unclear whether the report's title reflects the GAO's leaden wonkishness or a terrifically dry sense of humor, but it is called "FEMA's Rate-Setting Process Warrants Attention." It will be interesting to see what kind of attention it gets when current authorization for the NFIP expires on March 6, 2009.
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio