Agents in the wind

As is so often the case, insurance agents are caught in the middle. This time it’s in the debate over whether to add wind coverage to the federal flood insurance program.

Mississippi Congressman Taylor has inserted language into a House panel’s National Flood Insurance Program reform bill that will increase coverage for flood and windstorm damages. It expands the NFIP to provide for an optional multiple peril policy to cover wind and flood risk-in-one policy. This section requires premiums for the new optional coverage to be risk-based and actuarially sound, so that the program would be required to collect enough premiums to pay claims.

The multiple peril policies would be available where local governments enforce building codes and standards designed to minimize wind damage. Any community participating in the flood insurance program could opt into the multiple peril option. The multiple peril residential policy limits is $500,000 for the structure and $150,000 for contents and loss of use. Nonresidential properties could be covered to $1 million for structure and $750,000 for contents and business interruption.

Many believe that getting the federal government involved in wind coverage or any insurance is not the best course of action. But it is also the case that wind insurance is not as readily available as private insurers opposed to the federal expansion suggest.

Insurers argue that adding wind to the federal program is not needed because private sector insurers, reinsurers and residual market programs already make wind coverage available. But a recent RAND study (see page 7) found that many businesses along the Gulf Coast have had trouble obtaining wind insurance since Katrina, Rita, and Wilma hit in 2005 and have often had to pay twice as much or more than they did previously.

While for insurers, availability has no price tag, for businesses that are trying to get back on their feet, if it’s too expensive, it’s unavailable.

The RAND report — and common sense– suggests that the wind insurance situation has delayed some business recovery in the Gulf region since the 2005 hurricanes, at least in wind prone localities. Half the lenders interviewed said they knew of business projects delayed or cancelled because of high insurance prices or the unavailability of insurance. So for some policymakers, this is an economic development issue.

In the RAND researchers’ view, when it comes to covering infrequent, catastrophic events, private insurance markets may try to reduce the risk of financial collapse by charging premiums that exceed expected losses.

On the other hand, while government might be able to set insurance prices closer to the long-run expected loss for natural disasters thanks to the buffer of tax revenues, government faces political pressure to set premiums too low. Government intervention may also compound the problem by reducing private insurers’ willingness to provide insurance and fostering development in high-risk locations.

The RAND researchers warn policymakers not to put blind faith in either the private market or government programs to create a well-functioning insurance system.

Meanwhile, many employers have put their faith in their local insurance agents to come up with a solution, one that accomplishes that balance that preserves private markets while also keeping their customers — and their agencies — in business.