SADOW: Kennedy’s State Flood Insurance Won’t Fly Without Federal Changes

Today higher, in some cases much higher, premiums go into effect for flood insurance across the country, but disproportionately so in Louisiana. Last week, state Treas. John Kennedy said he wanted to start a conversation about what the state could do to lower these rates. And when we do it, it turns out to be a lot of hot air.

Kennedy’s suggested that the state create its own, basic flood insurance program with the federal program as a catastrophic backstop that might allow combined rates overall to come down. He figured this possible as state authorities could factor in to pricing elements such as locally-built levees not considered by the Federal Emergency Management Agency in its determination of flood risk used by the National Flood Insurance Program. He said a similar state insurer, Louisiana Citizens Property Insurance Corporation, might serve as a model.

Whether that would produce an outcome of lower aggregate pricing is anybody’s guess, but Insurance Commissioner Jim Donelon sees certainly it would increase the administrative complexity. He also noted this is not something the state unilaterally could do in any event, for changes to federal law would have to be made to alter its nature to accommodate.

Further, Senate Insurance Committee Chairman Blade Morrish correctly notes the unlikelihood that any state involvement could lower prices without increasing its taxpayer risk, echoing industry professionals and analysts who point out that having state insurance involves a smaller policyholder base, which increasing volatility to the upside in costs. In other words, the only way to get lower rates in aggregate would be to create some kind of state subsidization in all likelihood because of the relatively riskier pool created.

Part of the problem comes because flooding by its nature is catastrophic. General storm damage, for example, could be anywhere from none to a total loss; houses next to each other may have one wiped out with the other undamaged. But with flooding, as soon as even a trace of water enters a house, substantial damage occurs, mainly flooring and carpeting. Add a couple of inches more, and it’s multiplied considerably, affecting contents, drywall, insulation, doors, and probably the electrical system. Beyond that, it takes a few feet more for anything more substantial, such as structural integrity, to be threatened. And unless elevations vary wildly among neighboring houses, all are affected equally. That is, unlike most property damage that can work on gradations, with floods they operate more like a tipping point from no to substantial damage.

This quality jacks up risk of damage and therefore the necessity of having a large reserve ready to go at any given time; therefore, the higher premiums go to fulfill that. And the fewer households involved, the higher each pays because the lower-risk end is underrepresented. This is why it is less costly to the citizenry to have a Citizens kind of general insurer than it would to have, in a proportional sense, a flood line to it as well.

So, Kennedy’s notion falls flat. The best outcome would be for the federal government to exit the insurance business completely (which Morrish recommends as well) in favor of episodic catastrophic relief, but is entirely unlikely to happen any time soon with implementation the recent NFIP reforms designed to produce more accurate pricing, albeit forcing premiums much higher for a very small segment of ratepayers.

Given that, at the aggregate level the state can continue its existing plan of trying to lower rates for many by implementing its coastal protection strategy designed to arrest subsidence and erosion and to build ring levees where needed (provided it can blunt interference from a rogue local agency wishing to impose its own policy ahead of the state’s). The only new thing the state could do at the individual level would be to provide grants for elevation purposes, expanding the Road Home effort, but this also could turn out to be impractically expensive.

With Kennedy’s idea wanting and with the state’s best option to continue doing as is so long as federal government policy doesn’t accommodate it, this conversation unfortunately yields little of value.

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