Flood Insurance Premiums rise following Katrina and Sandy beyond what Some can Afford

Posted by PITHOCRATES - June 9th, 2013

Week in Review

Few things are as enjoyable as a beachfront view.  What a way to live.  Seeing the sunrise over the ocean.  Breathing that sea air.  Walking out your door to the water’s edge.  How lucky those lucky few are who live on the ocean’s edge.  Of course, there are some drawbacks to living on the ocean’s edge (see After Sandy, a new threat: Soaring flood insurance by Katie Zezima and Meghan Barr, Associated Press, posted 6/10/2013 on Yahoo! News).

George Kasimos has almost finished repairing flood damage to his waterfront home, but his Superstorm Sandy nightmare is far from over.

Like thousands of others in the hardest-hit coastal stretches of New Jersey and New York, his life is in limbo as he waits to see if tough new coastal rebuilding rules make it just too expensive for him to stay.

That’s because the federal government’s newly released advisory flood maps have put his Toms River home in the most vulnerable area — the “velocity zone.” If that sticks, he’d have to jack his house up 14 feet on stilts at a cost of $150,000 or face up to $30,000 a year in flood insurance premiums…

Officials are urging people to elevate their houses now because they are eligible for federal financial aid. About $350 million of New York City’s and $600 million of New Jersey’s Sandy relief funding has been allocated for the repair of single- and two-family homes, which could help defray the cost…

Several months before Sandy hit, Congress quietly passed the Biggert-Waters Flood Insurance Reform Act, a bill that authorized skyrocketing premium increases for people in flood-prone communities.

It was a desperate attempt to keep the program financially solvent after it was nearly bankrupted by an onslaught of claims from Hurricane Katrina, which forced the federal government to borrow about $17 billion from the Treasury.

Borrowing $17 billion from the Treasury?  That means borrowing $17 billion from the taxpayers.  And that’s the sad truth.  The people who don’t enjoy living on the ocean’s edge are the ones who end up paying for storm damage suffered by those living on the ocean’s edge.  People who shouldn’t be subsidizing someone’s dangerous home location.  Unless these people throw open their doors for all of us to come over and spend a few weeks on the beach with them.

Living on the ocean’s edge is both beautiful and dangerous.  Those who enjoy the beauty should pay for the privilege of enjoying that beauty.  Yes, it’s sad these people lost so much from Sandy.  But it was their choice to live there.  And they should pay all the costs required to live there.  Including all their insurance costs.  Like every other home owner must do that doesn’t have that gorgeous ocean view.

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Britain trying to Spread the Risk and Cost of Floods to those who Don’t Live in Floodplains

Posted by PITHOCRATES - December 9th, 2012

Week in Review

Insurance manages financial risk.  One of the earliest forms of insurance was marine insurance.  For it was very risky shipping things across the ocean.  Sometimes storms damaged ships.  Requiring the crew to jettison some cargo to make the damaged ship seaworthy.  So all shippers paid a little extra to provide something we called ‘general average’.  So when the ship reached its destination those who still had cargo aboard could sell it.  While those whose cargo went overboard to make the ship safe for everyone else got this insurance money.

Those who were taking a risk bought insurance to manage their risk.  So that in the event of a loss they mitigated their financial losses.  This is a very important fundamental of insurance.  Those who take a risk pay the costs of managing that risk.  A blacksmith working in an inland community didn’t contribute to the general average.  Because he had no risk exposure on that ship.  So to reiterate, risk takers pay the cost of insurance to mitigate their potential financial losses.  Which the free market does brilliantly.  Except when an activity is so risky that everyone exposed to a risk will suffer a loss.  As in flood insurance (see Flood insurance warning by MP Jonathan Evans posted 12/9/2012 on BBC News Wales).

The existing deal, reached in 2008, obliges insurers to provide cover for high-risk properties while the UK government continues to fund improved flood defences…

The Association of British Insurers (ABI) is calling on the government to share the financial risk for the areas with the most homes at significant flood risk…

“The reason for that is that people who are at risk of flood, lots of those people being in Wales, a quarter of a million houses across the UK, those people are probably paying about a half of what the real risk of flood is,” he said…

“No country in the world has a free market for flood insurance with high levels of affordable cover without some form of government involvement.”

“We could have a complex system in which we could potentially see a charge of £20 or £30 across the board for everybody – whether affected by flood or not – with everybody doing their bit.

“But that could be viewed as being unfair on the poor.”

The problem with flood insurance is that everyone engaging in risky behavior by living in a floodplain will suffer a loss.  If a flood washes away every home they will have to rebuild every home.  Instead of everyone paying a little bit to pay for one or two lost homes everyone will have to pay a lot.  To cover the replacement value of their own home.  Because there is no way to spread the risk when everyone suffers a loss.

When your insurance premium is the value of the home your insurance is not insurance.  You’re just putting some money aside so you can buy your house again in another 10 years or so.  Or however often a floodplain floods.  Which is the risk people take by living in floodplains.  Or should be.  But governments step in and have the responsible living outside of floodplains subsidize the risky behavior of those living in floodplains.  By subsidizing the cost of their irresponsible behavior with taxpayer money.

Yes, it is heart-wrenching to see the devastation of a massive flood.  Like in New Jersey and New York following Hurricane Sandy.  And seeing those homeowners lose everything.  Especially those who did not renew their federally provided flood insurance (it is a federal requirement to buy flood insurance when buying a house in a floodplain.  But there is no federal requirement to renew that coverage once the initial term of that policy expires).  Because it was too costly.

Coastal areas have beautiful vistas.  Which is why people take risks and move into floodplains.  But if they do they should bear the financial costs.  Not those living responsibly.  With far less beautiful vistas.

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Hurricane Sandy Generates Economic Activity at the Expense of those who Lost Their Homes

Posted by PITHOCRATES - November 25th, 2012

Week in Review

Hurricane Sandy left a swathe of destruction in its path.  But it turns out there is a silver lining to this death and destruction.  It’s providing an economic stimulus.  A regular Keynesian stimulus bill.  Only without the messiness of having to get a majority vote in Congress.  Something the politicians can really get behind.  If only they could get a hurricane generating machine (see Sandy Seen Boosting U.S. With as Much as $240 Billion Rebuilding by Jeff Kearns, Susanna Pak and Noah Buhayar posted 11/23/2012 on Bloomberg).

John Cataneo is working his 20 employees overtime and still can’t keep up with demand from customers who need plumbing repaired after superstorm Sandy. He says he’s hired two new workers and may need more…

Cataneo’s experience shows how the storm is giving the U.S. Northeast — and the rest of the country — an economic boost that may eventually surpass the loss of business it caused. Reconstruction and related purchases and hiring may range from $140 billion to $240 billion and increase U.S. economic growth by 0.5 percentage point next year, assuming $50 billion in losses, according to Economic Outlook Group LLC, a Princeton, New Jersey-based forecasting firm.

Well, that’s good news, isn’t it?  Up to $240 billion in new economic activity.  Wow.  Guess hurricanes are good things.  A blessing.  Providing new jobs.  Injecting new money into the local economy.  Why, there hardly is a downside.  Except for this (see After Sandy damage, insurance adjusters may bring more bad news by Ben Berkowitz, Michelle Conlin and Jonathan Allen posted 11/23/2012 on Reuters).

After another day of pumping out their swampy, moldy houses, neighbors in Breezy Point in New York City huddled at the quaint generator-powered firehouse Wednesday night, stamping their feet to stay warm. Neighbors picked at food from tin cans and sipped soups from Styrofoam cups as they lamented the growing holes in a safety net they thought they had: homeowner’s insurance.

“They’re covering five shingles and a piece of gutter, and that’s it,” says Kathleen Valentine, a fire alarm dispatcher who spent the night of Superstorm Sandy working while her house filled with water and dead fish. Her insurance agent from Narragansett Bay Insurance Company said her policy would pay only for wind damage. She is still waiting for someone from the federal flood insurance program to show up…

The trouble is, many homeowners don’t read those policies closely enough to realize that most don’t cover flooding. They don’t always get both homeowner’s insurance, usually provided by a private company, and flood insurance provided through the U.S. government’s National Flood Insurance Program.

Only 14 percent of homeowners in the Northeast hold flood insurance policies, according to the Insurance Information Institute.

Federal law requires flood insurance to mortgage any home in a designated high-risk floodplain. But once the initial policy, usually for a year term, expires, no law says you have to renew it, and many people don’t because banks don’t make them.

In New Jersey, only 231,000 of the homes in the 20 coastal counties had flood insurance, according to FEMA.

There’s a reason why private insurance companies don’t sell flood insurance to people living in high-risk floodplains.  The cost of the policies would be so high to cover the losses in the event of a flood (pretty much rebuilding all houses in the area) that no one would buy the insurance.  So why bother?  Which is why the federal government provides flood insurance.  So they can spread the cost of flood claims to people who don’t live in high-risk floodplains.  Something insurance companies can’t do.  Because they don’t have the power to tax or print money.  But even the policies the government sells are too expensive for 86% of the people living in high-risk floodplains.  So they don’t buy them.  And suffer the consequences when the flood comes.

So that blessing of Keynesian-like economic stimulus?  The money to pay for it comes from in part insurance companies who can’t invest that money elsewhere.  In part from the federal government, further increasing the federal deficit which is ultimately paid by the taxpayers.  But mostly from the people who lost everything and have to pay out of pocket to rebuild their lives.  This is the blessing of that economic activity.  The destruction of lives so other people can prosper.

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FUNDAMENTAL TRUTH #21: “The reason why health insurance is so expensive is because it is not insurance.” -Old Pithy

Posted by PITHOCRATES - July 6th, 2010

YOU CAME IN with a grand ‘to lose’ but have been riding a hot streak.  You’re up 5 grand.  And feeling luckier still.  You came in with a grand, you think, so you can just as well leave with a grand.  So you bet 5 grand.  Cause those cards have been so good to you tonight.  And there it is.  Blackjack!  And just as you’re about to shout to the heavens you see the dealer throw an ace on his down card.  The dealer asks, “Insurance?”   

You don’t want to but you just KNOW what’s under that ace.  All of a sudden you’re not so cavalier about losing 5 grand.  Too many friends have told you the same story.  “I was up 5 grand until that last hand.”   You could cry.  You don’t buy insurance.  Only suckers buy insurance.  That’s what you’ve always said.  But when you’ve got 5 grand on the table, the dealer can’t have anything but blackjack.  You know it.  He knows it.  And your wife knows it even though she’s off playing the slots somewhere.  You pull out $2,500 from your ‘do not touch’ money and buy the insurance.  (Let’s end this on a happy note.  The down card was a queen.  You walk away as if that last hand never happened, $5,000 richer.  Less taxes, of course.)

LIFE’S BEEN GOOD.  You’re making good money.  You have a beautiful wife and 3 great kids.  You just sold that small house and moved into that big house you always wanted for the holidays.  Cost a pretty penny.  But you had $75,000 in equity in the old home.  And cashed in a CD to furnish the new one with some nice new toys.  After all, life has been good.

The mortgage stings a little, but not too much.  You’ll get by.  You got all the big things you’ve wanted.  Now you can settle in and live modestly in your new home.  And you bought insurance up the wazoo.  If there is fire, flood, theft or death, no worries.  Well, there’ll be some worry, but you won’t financially ruin your family.  They’ll keep the house.  And there will be college for the kids.  Because you were responsible.  You protected the greatest investment of your life.  Yes, things have been good.  But not good enough to pay for everything twice.

TRADE EXPLODED IN the 17th century as little wooden ships crossed the oceans.  Storms and rough seas, though, toss around little wooden ships.  A lot of them sank.  With their cargoes.  But they didn’t all sink.  So owners insured their ships and cargoes.  For a nominal fee, they protected their investment.  For those that didn’t sink, the insurance wasn’t much of an added expense.  For those that did sink, it paid to replace the lost ship and cargo. 

YOU’VE ALWAYS WANTED to open a restaurant.  And your dream finally came true.  You saved for years.  You scrimped on vacations.  Didn’t by a new car.  Expensive toys.  No.  Your years of denying yourself the little pleasures in life saved up enough money to buy that restaurant.  To put enough money down to borrow to fit out the kitchen and dining area.  To stock your fridge, freezer and pantry.  You maxed out your credit and sunk your life savings into your dream.  And you’re loving it.  But you don’t want to lose it.  So you have all the insurances.  Fire.  Property.  Workers’ comp.  Liability.  So in case of fire, celebrating students (who trash the town after winning the championship), a strained employee back or an E. coli outbreak (because an employee didn’t wash his hands after using the toilet), you’re protected.  Your business may suffer, as they are wont to do after an E. coli outbreak, but the lawsuits won’t leave you destitute.

BEING IN THE NFL is a dream come true to many athletes.  But it can be a brutal occupation.  Compared to other professional sports, it has a short season.  Why?  Attrition.  Concussions, broken bones, torn ligaments and contusions take their toll.  The short season allows a longer healing period.  And time for surgeries.

Players can make obscene amounts of money.  But they can also suffer a career-ending injury in the first year of a multi-year contract. Great playing potential means great earning potential.  If you stay healthy and play.  Of course, if injured, all gone.  Some players insure against a career-ending injury.  Lloyd’s of London will insure an athlete.  For a price.  It ain’t cheap.  But if it keeps you from losing, say, 20 million in earnings, it could turn out to be quite the bargain.  If you’ve got huge potential.

THE MOST PRECIOUS gift we all have is our life.  So we take care of it.  We watch what we eat, don’t drink, don’t smoke, don’t take drugs, don’t speed in our cars or while on our motorcycles, don’t drink and drive, don’t drive around flashing railroad crossing barriers, don’t binge drink, don’t have unprotected sex, don’t play with matches or run with scissors and don’t do that thing where you jump up on a railing with a skateboard and fall, crushing your testicles on the railing and hitting your head on the concrete step.  No, we exercise, go to bed early and eat a lot of bran. 

All right, we probably don’t eat as much bran as we should.  And maybe we do a risky thing or two.  But we understand that those risky things we DO do can cost us.  Could wipe us out financially.  So we buy insurance to protect our life savings in the event of a catastrophic event that could be medically very expensive.

Or do we?

EVERYONE THAT HAS ever bought blackjack insurance didn’t get a winning blackjack hand.  Everyone that has ever bought homeowner’s insurance didn’t get a new home with their policy.  Everyone that has ever bought mariner’s insurance didn’t get a ship and a cargo of goodies with their premium payment.  Everyone that has ever bought business insurance didn’t get a business with their payment.  And an NFL player doesn’t get a dime from Lloyd’s of London until something pretty horrible happens first.  No.  These purchases were ‘just in case’.  Most people will never get anything for their payments (other than peace of mind).  Only those who suffer a loss will.  And those that do will have mitigated their financial losses with the insurance they so wisely purchased.  And they will get on with their lives.

This is insurance.   We use it to protect our wealth.  It takes a lot of time to accrue it.  So when we have it, we tend to protect it.  We do risky things.  And insurance manages that risk.  So we don’t lose everything we have because of a catastrophic event. 

We don’t think like this when it comes to health insurance, though.  We don’t think of health insurance as a way to manage our risk.  We look at it as a free ride.  If we have it, we expect free health care.  We want everything.  But we don’t want to pay for anything.  Free mammograms.  Those blue pills for the old johnson.  Heart valves.  Prenatal care.  Child vaccination.  Etc.

The problem is, these things cost.  A lot.  And if anybody can have them, those who actually pay for insurance have to pay for them.  And they’ll be paying for things they aren’t using.  All those things listed above mean nothing to a young single male.  But he’s helping to pay for that stuff.  Either by his premium contribution.  Or in lost wages.  Because an employer can’t afford such quality health insurance AND high wages.

Health insurance has become nothing more than a wealth transfer.  It’s like a Ponzi scheme.  A large and ‘growing’ group of healthy young people pay into the system and collect few benefits.  The ‘fewer’, older, sicker people pay little into the system but consume the lion’s share of the benefits.  At least in theory.  But like social security, and all Ponzi schemes, the theory doesn’t work in practice.

AMERICA HAS THE best health care in the world.  If you judge by where the affluent go for their health care.  They go to America.  And the best is never cheap.  You get what you pay for.  And if you want the best, expect to pay.  A lot.

All right, we have the best and some of the most expensive health care in the world.  Add to that an aging population.  What do you get?  A shrinking group of people (the young and healthy) paying for a growing group of people (the old and sick).  That means the burden on those paying into the system has to what?  It has to keep getting bigger.

But it can’t.  The young and healthy will just opt out.  Eventually.  When it gets to the point that it’s a car payment or a health insurance payment, what do you think they’ll choose?  Their annual health care expenses for an entire year may not equal one premium payment.  So they’ll say screw that.  And do.  A lot of young do not have health insurance because they choose not.  It’s just too fricking expensive.  And this just shrinks the shrinking group more.  Which increases the amount those with insurance pay.  And so it goes.

AND YOU DON’T fix this problem by nationalizing health care.  That doesn’t address the problem.  You have to tie the cost to the benefit.  People only chose to pay for things they get.  Those receiving the benefit, then, need to pay its cost.  Like we do with every other thing in our lives.  You want a TV you pay for a TV.  You don’t pay for one so your neighbor can have one.  TV prices are very reasonable, too.  They keep coming down.  The quality is fantastic.  And so it would be in health care.

Single payer health care insurance ain’t the answer either.  Because it’s not insurance.  It’s a wealth transfer.  That means it’s political.  It will serve political ends.  Not make good health care.  First of all, they’ll force the young and healthy to pay for insurance under penalty of law.  Or they’ll raise taxes until it hurts.  Then they’ll cut costs.  First by limiting what doctors can earn.  Then they’ll limit the profits the pharmaceuticals can make.  Then the medical device makers will have their turn.  Soon, people won’t want to be doctors any more.  Or make new and life saving drugs.  Or make medical devices.  So when the supply of these things falls, rationing must follow.  And if you really want to cut costs, there’s really only one place to do it.  The really sick and the really old.  These people, after all, consume the lion’s share of health care services. 

We don’t have a health care problem.  People are living longer than ever.  We have a dependency problem.  The current system has made us dependent on others for our health care.  And dependency kills.  It cowers a people.  Takes away their dignity.  Makes them subservient.  People live in fear.  Of what they may lose.  Nationalizing health care will only make us more dependent.  It’s not the answer.  Unless you want to conquer and subjugate a people.  I mean, how many of you have stayed at job you absolutely hated because of the health insurance?  If that ain’t subjugated, I don’t know what is.  As bad as that was, at least you got something for it.  Good health care.  If you think you’re going to get that under a national system, think again.  Or ask those people with a national system that come to this country for better care.

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