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Sandy Could Spur Renewed Flood-Insurance Reform

Source: WSJ

Posted on 01 Nov 2012 by Neilson

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NFIPSuperstorm Sandy may give fresh ammunition to critics of the federal government’s flood-insurance program who have long wanted it to operate more like private-sector insurance.

Currently, the debt-strapped National Flood Insurance Program has a $20.8 billion cap in the amount of money it can borrow from the U.S. Treasury to pay flood-loss claims. But the program has already borrowed around $18 billion, mainly to pay for Hurricane Katrina in 2005.

Losses from Sandy, as we write today, could easily push the program over its current borrowing limit.

If that happens, the Department of Homeland Security would have to ask Congress for the ability to borrow more money. That could trigger a debate in Congress, where Republicans in the House and Senate might pursue changes to the program.

The program is run by the Federal Emergency Management Agency. A spokesman for FEMA said the agency has about $4 billion in cash and borrowing authority left, and that no decision has been made on whether to ask Congress for more money.

One critic has been Sen. Tom Coburn (R., Okla.) who successfully earlier this year won a gradual elimination of premium subsidies for vacation homes.

Ray Lehmann, senior fellow at the R Street Institute, a free-market think tank focused on insurance issues, said Congress should require FEMA to use reinsurance or sell catastrophe bonds to offload some risk to the private sector. A bill passed over the summer allows the agency to do so but doesn’t require it.

Mr. Lehmann added the government in the long run should phase in market rates for all consumers who buy flood policies, eliminating subsidies for properties before the mid-1970s. Doing so would gradually allow the private sector to provide flood insurance, he said.

“That creates the conditions that, over the longer term, can make a full privatization of the (flood insurance program) a real possibility,” he said.