Don't Extend Insurance to Wind Damage

In an effort to address concerns of coastal residents and reduce their financial risk from hurricanes, the national government is debating an expansion of its role in coastal insurance.

One such proposal — the Multiple Peril Insurance Act, introduced by Rep. Gene Taylor, D-Miss., in early 2007 — would expand the National Flood Insurance Program to include windstorm coverage.

NFIP is the U.S. government’s flood insurance and mitigation system; it’s designed to reduce the cost of natural flood disasters and promote mitigation efforts in flood-prone areas.

NFIP is negotiated as an agreement between individual communities and the federal government. In its current form, NFIP offers flood insurance to residents as financial protection against flood losses. In return, the residents’ community must agree to adopt and enforce a flood plain management ordinance to reduce future flood risks.

NFIP currently covers about 4.5 million homes in more than 20,000 communities.

The 40-year-old program has not lived up to expectations. Although NFIP was designed to be self-sustaining, a congressional report found in 2004 that the program costs taxpayers up to $200 million annually, primarily because some properties experience repetitive losses.

Since 1984, NFIP has paid out nearly $1 billion for at least 10,000 properties that have experienced two or more losses, with cumulative claims often exceeding the value of the property, the National Center for Policy Analysis reports.

In 2007, the U.S. Census Bureau estimated 35.3 million people live in hurricane-prone coastal areas stretching from North Carolina to Texas. Adding windstorm coverage to NFIP would encourage people to ignore important market signals and the real risks of living in the path of danger.

Providing hurricane coverage in coastal areas often is prohibitively expensive for both insurers and the insured. Those high prices are an important market signal, reminding prospective and current property owners about the dangers of living in hurricane-prone areas.

The market signal of a high property insurance premium is the first line of defense in disaster preparedness. It warns property owners to consider the risks of hurricanes.

NFIP already disproportionately favors the wealthy, and extending it to wind coverage would exacerbate that problem. More than 70 percent of coastal land — land that is highly valued in the real estate market — is privately owned. Many taxpayer-funded disaster loans and mitigation and erosion control programs subsidize the properties of wealthier homeowners.

The proposal to extend NFIP is opposed by many groups in the industry and government, including the Insurance Information Institute and Property Casualty Insurers Association of America. They say an expanded NFIP would displace the private market (which already provides windstorm coverage) and create an environment where taxpayers in areas with less risk exposure would subsidize the cost of living in beachfront homes and other dwellings with greater exposure.

Representatives from the Federal Emergency Management Agency opposed the original expansion proposal in 2007.

Adding wind coverage to NFIP would serve only to exacerbate its existing problems while adding billions of dollars in new liabilities for taxpayers — and all in the middle of an economic downturn, too.