Weaknesses discovered in the Howard Hanson Dam in Washington state’s Green River Valley have led Washington legislators to consider creating a new state-run flood insurance program.
Citing weaknesses in one of the dam’s abutments, the U.S. Army Corps of Engineers has warned homeowners there is a significantly higher than normal risk the Corps will have to spill more water over the dam. This would put less stress on the dam but also raise the risk of significant annual floods.
The Corps of Engineers has started repairing and strengthening the damaged abutment and plans to have the dam restored to its full strength in five to seven years.
Increased Flood Risk
In the meantime, homeowners and business owners in the Green Valley region face increased flood risk and require additional insurance protection. Companies in the Green River Valley support about 100,000 jobs, and the region is one of the largest distribution and manufacturing centers in the Western United States.
Although the National Flood Insurance Program sells coverage in the area, it is limited to $500,000 per commercial building and $500,000 for the building’s contents. Some legislators, concerned the private insurance industry may not be up to the challenge, have moved to develop a government-run option for homeowners.
Commissioner Seeks Authority
“In response [to the damaged Howard Hanson Dam], we sought authority to establish a joint underwriting association if necessary,” said Rich Roesler, spokesman for Insurance Commissioner Mike Kreidler. “This would be a pool, which insurers would be required to participate in as a condition of doing business in this state, to sell flood insurance coverage in this area.”
He said the powers would be temporary and might never be used.
“It’s an insurer of last resort, and since the rates are intended to be actuarially sound—priced against the risk—the coverage would not be cheap, but at least it would be available,” he said. “The insurers’ total exposure would be limited to $250 million. That’s a very small fraction of the total property value that’s insured in Washington State.”
Roesler said premiums to property/casualty insurance companies alone in Washington in 2008 totaled $9.1 billion.
Cost Hikes Forecast
The Property and Casualty Insurance Association of America argues Commissioner Kreidler’s proposal might be moving too far and too quickly.
“We believe if the Commissioner were to examine the existing market for business flood protection, he would find that insurers are serving the market today,” said Kenton Brine, assistant vice president of the association. “The insurance marketplace is competitive and capable of meeting the needs of consumers. Passing a law granting broad new powers to the Commissioner to create state-run [Joint Underwriting Authorities] that would compete—tax-free—with private carriers could severely harm or destroy an existing, competitive insurance environment and raise costs for consumers across many lines of insurance.”
Brine recommends smaller steps before creating a state program.
“Establishing a Joint Underwriting Authority (JUA) or, worse, passing a law allowing JUAs to be formed at the pleasure of the Insurance Commissioner without prior legislative approval, is jumping the gun,” he said. “We believe the commissioner should act as he has in other difficult markets, by creating a Market Assistance Program or appointing an ombudsman to connect business owners with insurance producers and carriers.”
Roesler agrees, arguing a JUA is and should remain only one of many options.
Commissioner Prefers Voluntary
“But under the legislation, the first step—and hopefully this is all that will be needed—is to ask insurers to voluntarily form what’s called a ‘market assistance plan.’ This is essentially a matchmaking service to help businesses needing coverage link up with insurers still selling it,” said Roesler.
“We’ve invited nearly 200 insurers to form the MAP, which they’d run, under the oversight of our office,” he added. “It’s not a pool, nor is it government insurance like the federal NFIP program. The MAP sells private insurance, sold by private companies, to businesses and others that need it. Our sincere hope is that we can get through this crisis with this purely voluntary, private-sector approach.”
The state’s goal is to help “facilitate a voluntary, private-sector solution,” said Roesler. “We would also argue that setting up a joint underwriting association—with limited exposure for the insurers—is a measured response to this temporary crisis. But for us, it would be a last resort.
If things go as we hope, the matchmaking will go well, private businesses will connect up with private insurers, and no significant government involvement will be needed.”
Brine agreed creating a joint underwriting authority should only be considered as a “last-resort option.”
“If established, any JUA should be specifically authorized by the Legislature, tightly focused on a specific risk for which there is no other available market, and should charge rates that are actuarially sound to support the risks it will insure,” he said in the press statement.
Matthew Glans ([email protected]) is a legislative specialist in financial services for The Heartland Institute.