Hurricanes, flood insurance, the budget and tax cuts

Shannon Bohrer

(11/2017) Hurricanes Harvey, Irma and Marie were news and then more news. Before the hurricanes even made landfall, government agencies, private charities and individual citizens made preparations. When the hurricanes struck the relief efforts began - and in many places they still continue. The damage, devastation and loss of life were so great it is expected that many communities will take years to recover. Some may never recover and of course, that is providing the same communities are not struck with additional storms.

We understand from recent history, with Hurricane Sandy in New Jersey and before that, Hurricane Katrina in New Orleans, that recovery takes time and a lot of money. We also understand that these horrific storms have broad impacts, starting with loss of life. Impacts also include homeowners without flood insurance meaning that many have lost everything.

We see the news, we donate to charities and we follow some recovery efforts and then we move on. That is until another storm or national emergency happens. The problem is that these national emergencies seem to occur more frequently. Are they becoming normal? Are we as a nation doing enough to prepare for future emergencies? While we were all watching the floods, the west was burning up with wild fires and more hurricanes were forming. Of course since they seem to also be occurring more frequently, maybe the public is just tired of watching.

Moody's Analytics projected the economic cost of Hurricane Irma, in Florida, will be $64 billion to $92 billion. That's in addition to the projection of $108 billion from an estimated damage from Harvey. Hurricane Marie’s initial estimate is 90 billion. Just these three storms could cost $276 billion. That sounds like a big problem, but we have insurance – don’t we? Actually, we don’t. According to the news reports, it is estimated that only about 10 percent of those affected have flood insurance.

The Federal government sells flood insurance. It is known as the National flood Insurance Program (NFIP).

The National Flood Insurance Program was created in 1968. Why it was created was simple. The private insurance companies left the markets when they realized it was not profitable. Currently home owners in areas called "NFIP – participating communities" are eligible to purchase the insurance. In theory, the communities have a risk of flooding and have adopted mitigation measures to deal with floods. The insurance rates are heavily subsidized. Currently the NFIP is $25 billion is debt, but it collects around $3.5 billion in premiums. These numbers were before Harvey, Irma and Marie.

"Whether or not FEMA will ultimately be able to pay off the debt is largely dependent on future insurance claims, namely if catastrophic flooding incidents such as Hurricanes Sandy or Katrina occur again and with what frequency." The quote was from a congressional report, published just a month before Harvey. That does not sound good.

How will congress solve this issue? Can the government continue to subsidize insurance for millions of homeowners? It is really very simple, if the government charges its customers the real cost of insuring at risk properties from flooding, the government’s NFIP would be solvent. However, the cost of insurance would be so high that many or most could not afford it, so fewer would be covered. That would mean that the NFIP would still be losing money.

The NFIP has been questioned before about problems and issues and has gone through a few changes. One change only allowed for a limited number of payments due to flooding and then the government would purchase the property. That did not last long. Just imagine a group of multi – millionaires having homes in almost exclusive waterfront properties. The homes are flooded and the government wants to take possession of the properties. I am sure the home owners started calling their congress persons - since the rule was reversed.

Another issue was that the NFIP did not allow the sale of flood insurance, unless the property was actually in a flood zone. After some major disasters, like Katrina, the program changed so more individuals could purchase the insurance. Sounded like a money maker, selling insurance to homeowners that are not supposed to flood. However, many of those properties in none flood zones - are now flooding.

Many groups complain that by selling subsidized flood insurance the NFIP is creating incentives for individuals to move into flood prone areas. This is evident in that the NFIP refers to properties that repeatedly flood as "Repetitive" and "Severe Repetitive Loss Properties." Meaning the NFIP is subsidizing the rebuilding, repeatedly, with no encouragement to move to non-flood areas. As one "Severe Repetitive" Houston homeowner recently said, if I could sell my property, I would. He said he has no choice but to stay put and keep paying his insurance premiums.

No matter how one examines the NFIP - problems exist and they seem to be growing. I don’t believe the government can stop providing the insurance, since millions of home owners rely on it. And at the same time, the NFIP cannot afford to sell more insurance, since each policy is a potential loss and the program is already in the red. More and more people are living in coastal areas and more and more will be flooded and more and more will buy the insurance. The NFIP is one very large subsidy – that is growing.

Related to the issue of debt, some members of congress that have stated – that in the future we will be unable to afford Medicare - because it cost too much. The latest federal budget proposal includes provision for future seniors to be given a stipend – to purchase their own insurance. Of course this won’t affect current Medicare recipients. At least that is what they are telling us.

In the midst of all this debt, our President and some members of congress have put forth a proposal to reduce our taxes. The party in power says this will be good for everyone and grow the economy. However, independent analysis predicts the economy will not grow and eighty percent of the proposed benefits will go to the top one percent. Millionaire tax cuts, insurance for million dollar homes on seashores, but we don’t have enough money for Medicare? I predict it will get worse – before it gets better.