Flood Insurance, debt monster

[The Minsky Moment]

Don't most Americans have a commute of several miles?

Increasing commute times and distances increases costs in itself, rather sizably when you start talking about tens of millions of people.  It also increases carbon consumption which may worsen the problem over time.

Also it is not uncommon to find that much of the land area surrounding ports and coastal cities is also low-lying and vulnerable to flooding under extreme conditions.

[DGuller]

Ok but what is the fair premium?

Premium that is commensurate with the property's risk.

If you look at the loss experience over the 20 year period from 1991-2010, the total claims paid out was about $35 billion, or 1.75 billion per year.
If you just focus on the last 10 years, it increases to over $2.8 billion per year, mostly due to the influence of 2005, in which over $17 billion was paid out in that year alone.  In most years, less than $1 billion was paid out.

The past loss experience suggests that the current $3.5 billion premium level should be sufficient, at least if we can cut down on the $1 billion the private insurers are skimming off the top.

This has little to do with what is a fair premium.  For a moment, let's say that the overall level of premium being collected for the flood insurance program is adequate.  That still doesn't say anything about how fair individual premiums are.  It could be that policyholders in very safe areas are overpaying for flood insurance, and are subsidizing people who get a new house every year.

[The Minsky Moment]

This has little to do with what is a fair premium.  For a moment, let's say that the overall level of premium being collected for the flood insurance program is adequate.  That still doesn't say anything about how fair individual premiums are.  It could be that policyholders in very safe areas are overpaying for flood insurance, and are subsidizing people who get a new house every year.

It could be but without spending thousands of hours analyzing data at a granular level, neither you nor I are in a position to judge that.  It is my understanding that the program attempts to vary premiums on risk.  It may be the risk categories need to be more finely defined, but at a certain point there is trade off between greater precision and complexity of administration.  I don't have a problem generally with the concept that costs within the program should be appropriately distributed to reflect risk to the extent feasible consistent with efficient administration.

The broader point is that looked at as a whole, there is no reason to think that the program isn't assessing sufficiently high premiums to cover losses, and the current year deficit is no different than when a reinsurer takes a big hit one year after many years of fat margins.

[Razgovory]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

Don't most Americans have a commute of several miles? There is no reason to live right on the waterfront even if you work in a port. I am sure that ports are by default flood threatened, but then I guess they can more easily afford the necessary insurance than private citizens. I don't see any problem with ports putting their extra insurance cost onto their prices.

Floods can flood a long way.

[Razgovory]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

Possibly, but so what?  If you buy products from China, you're in effect contributing to creating the need to have a port in a dangerous place, thus giving rise to that cost.  It's a lot more fair for you to pay extra for that, than for a taxpayer who buys only American.

Ports go both ways.  Products made in Kansas may be sold in France and they have to get there by boat.  Plus a lot of ports are used for interstate trade.  Another thing is that people who live in flood prone areas may not even know they live in a flood prone area.  Back in 1993 we had a catastrophic flood, many of the people who lived in those areas that were flood didn't even live close to water.  Areas that flood may do so infrequently or may do so because of someone else changed the flood plain by diverting a creek or screwing up the watershed.  You might live in a house for 50 years never seeing a flood, but suddenly get a flood.

[DGuller]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

Possibly, but so what?  If you buy products from China, you're in effect contributing to creating the need to have a port in a dangerous place, thus giving rise to that cost.  It's a lot more fair for you to pay extra for that, than for a taxpayer who buys only American.

Ports go both ways.  Products made in Kansas may be sold in France and they have to get there by boat.  Plus a lot of ports are used for interstate trade.  Another thing is that people who live in flood prone areas may not even know they live in a flood prone area.  Back in 1993 we had a catastrophic flood, many of the people who lived in those areas that were flood didn't even live close to water.  Areas that flood may do so infrequently or may do so because of someone else changed the flood plain by diverting a creek or screwing up the watershed.  You might live in a house for 50 years never seeing a flood, but suddenly get a flood.

Again, how is this relevant to the point that premiums should be set based on risk?

[PJL]

How about this for a solution.
1. Make private flood insurance compulsory for both insurers (they must provide it) and insurees (they must take it). Most likely this will affect premiums for everyone, but then again it wouldn't be much different than taxes covering existing plans anyway. The burden would however all be on the private sector.
2. All existing federal / public insurance agreements will be kept for existing homeowners only. New owners will have to get private insurance.
3. This is likely to lower house prices on the flood prone areas. Therefore to compensate for changing policy, the state should pay the prior market price for anyone currently on such a public insurance scheme, and sell to new owners at the current market price, if this is the case. The prior market price should however be fixed and not be index linked to prices of any kind.

[Razgovory]

Wouldn't the cost be passed on to everyone then?  I mean cities on the sea shore are usually there for a reason.  If you are going to charge more for people to live in in a place like a port, wouldn't they just pass the cost on in every product that moves through that the port?

Possibly, but so what?  If you buy products from China, you're in effect contributing to creating the need to have a port in a dangerous place, thus giving rise to that cost.  It's a lot more fair for you to pay extra for that, than for a taxpayer who buys only American.

Ports go both ways.  Products made in Kansas may be sold in France and they have to get there by boat.  Plus a lot of ports are used for interstate trade.  Another thing is that people who live in flood prone areas may not even know they live in a flood prone area.  Back in 1993 we had a catastrophic flood, many of the people who lived in those areas that were flood didn't even live close to water.  Areas that flood may do so infrequently or may do so because of someone else changed the flood plain by diverting a creek or screwing up the watershed.  You might live in a house for 50 years never seeing a flood, but suddenly get a flood.

Again, how is this relevant to the point that premiums should be set based on risk?

Risk can't be assessed very easily.  Secondly it doesn't seem fair if you were in a low risk area and someone comes a long fucking with the local creeks making your home a high risk area without you knowing.  The whole "LOL WHY U LIVE IN FLOOD AREA?  IT YOUR OWN FAULT" thing sorta falls flat there.  Also, people in Kansas benefit financially from the ports moving their products.

[DGuller]

Risk can't be assessed very easily.  Secondly it doesn't seem fair if you were in a low risk area and someone comes a long fucking with the local creeks making your home a high risk area without you knowing.  The whole "LOL WHY U LIVE IN FLOOD AREA?  IT YOUR OWN FAULT" thing sorta falls flat there.  Also, people in Kansas benefit financially from the ports moving their products.

Those are externalities, and they have little to do with the topic at hand.  It's not the job of insurance to compensate for externalities.

[The Minsky Moment]

.  It's not the job of insurance to compensate for externalities.

But it is the job of public policy to do so, and we are talking about a public insurance program.
So rather than view this one piece in isolation, it might make sense to view as a part of a general policy scheme addressing the broader problem

[DGuller]

.  It's not the job of insurance to compensate for externalities.

But it is the job of public policy to do so, and we are talking about a public insurance program.
So rather than view this one piece in isolation, it might make sense to view as a part of a general policy scheme addressing the broader problem

If you're going to address externalities, it might help to have the douchebag tinkering with the creek to pay something, rather than taxpayers or other flood insurance policyholders.  Raz's method just shifts the externality costs from one innocent party to another, so I don't see how we're getting anywhere more rational here.

[The Minsky Moment]

Alas Grover Norquist has forbidden any tax on douchebags or indeed any feminine hygeine product.  It's the only part of the entire GOP platform that is good for the single woman vote.

[garbon]

I'm assuming DGul wasn't being serious. After all, how do you assign said costs when it is all of us polluting that have made places like NJ and New York more prone to catastrophic weather?

[DGuller]

I'm assuming DGul wasn't being serious. After all, how do you assign said costs when it is all of us polluting that have made places like NJ and New York more prone to catastrophic weather?

You're taking for given a very contentious conclusion.  NYC area has been devastated by natural disasters before.  I don't think global warming was responsible for 1938 Long Island Express hurricane, or multiple hurricanes before that.  It has been living a charmed life for many decades until Irene and Sandy, but people in the know where always aware of the catastrophic potential there.

Regardless, even if there is global warming, different concepts need to be compartmentalized to avoid a slew of unintended effects.  The point of insurance is to convert uncertain costs into certain costs as fairly as possible.  Just because government had to step as insurer of last resort with floods doesn't change the nature of that insurance, and it doesn't mean that it has to be conflated with other concepts.  At the end of the day, society still loses when people keep rebuilding houses that are highly likely to be washed away again.

[HVC]

3. This is likely to lower house prices on the flood prone areas.

this will make it more likely that poor people will move into the area. people who can't afford insurance. what do you do when they lapse in their payemnts? kickem out of there house? when the next flood comes the government will be on the hook again becasue it'll be a PR nightmare to ignore the poor home owners.