Flood Insurance – A Post-Harvey Revisit

Like everyone with a home mortgage, I have homeowner’s insurance that covers most catastrophes, although the list of covered catastrophes specifically does not include flooding.

flood_insuranceOccasionally I worry because my house backs right up to the San Antonio River. Fortunately, my yard and house are outside the boundaries considered to have a 1 percent chance of flooding per year, the so-called “100-year flood plain.” So up until now I’ve never had flood insurance, nor have I been required to have it by my bank.

There was a bit of weather recently in Texas you may have heard about, which got me thinking again about flood insurance, and also about how reliable our current risk-assessment methods are.

As a financial rule, I’m usually in the “don’t buy too much insurance” camp, urging people to self-insure whenever possible. Or as the French might say, I adopt an “après moi, le deluge” approach to many insurable risks.

Flood insurance, however, might be in the special category of things for which self-insuring doesn’t work as well. Meaning, even though my house sits outside of the 100-year flood plain, I really cannot afford the unexpected but catastrophic loss of my house due to flooding.

I called up my insurance provider this past week to get a quote on flood insurance for my house. I learned a few things.

I received an annual premium quote of $499 for up to $250,000 in damage to my house, plus an additional $100,000 for personal belongings, subject to a $1,250 deductible in each loss category.

Interestingly, I learned my insurance provider is acting not as the underwriter of flood insurance, but rather as a broker for the federal government’s National Flood Insurance Program or NFIP administered by FEMA, the Federal Emergency Management Agency. [LINK:]

In fact, everyone has to go through a private insurance company to get this federal flood insurance. Almost nobody gets private flood insurance.

I mean, there’s also a private market solution, but barely. I went to one provider online and entered all my data to match the quote I got from my regular insurance provider. The annual premium would be $3,219. So, more than 6 times as expensive as the FEMA quote. With that difference, you can sort of see why the federal government dominates the market.

Matthew Hartwig, a spokesperson for insurance provider USAA, told me that their flood insurance call volumes rose up to 9 times their regular rates before, during, and after the landfall of Hurricane Harvey. Customer inquiries even now continue at a higher than normal rate.

Unfortunately, none of those flood insurance sales in late August and early September can help Hurricane Harvey victims, because of a 30-day wait rule, before recently-purchased flood insurance becomes effective. Buying now only helps for the next flood.

Interestingly, engineering and flood risk specialists are in the process of re-evaluating how we deal with flood risk these days.

The old way of risk assessment is to simply map out whether a property is, or is not, in a 100-year flood plain.

Patrice Melançon, Watershed Engineering Manager for the San Antonio River Authority, described to me at least a few engineering discussions underway in the wake of Harvey.

She cited her counterparts in Houston who are actively discussing whether the right level of “risky” should be to look closely at properties previously considered to be in a so-called “500-year flood plain,” or areas that have only a 0.2 percent chance of flooding per year.

harvey_floodingOf course, a common-sense reaction to that news is to wonder whether things have changed, possibly due to climate change, such that previous rainfall data informing the 100-year flood plain is no longer accurate in 2017.

While FEMA still relies on maps that show the 100-year flood plain, they are developing – in conjunction with local partners like SARA – a more sophisticated set of maps that show the likelihood of flooding within 30 years, as well as the probabilistic severity of flooding inside and outside the 100-year flood plain, The new maps are “informational” and “consultative” rather than being used for regulatory purposes like the 100-year flood plain maps, but nevertheless represent the next level of risk-analysis.

I’ll be checking out those new maps. Even now, about 25 percent of flood claims occur on houses located outside of a flood zone. That’s on houses that are deemed safely outside the flood plain, like mine.

Finally, Melançon mentioned to me that SARA expects to receive, in another 3 or 4 weeks, updated computer modeling and analysis of what would occur if Harvey-level rainfall dumped on the city of San Antonio. I’m pretty interested in those results too.

Personally, I don’t want to pay $500 to protect against a thing that’s never going to happen.

On the other hand, a “thing that’s never going to happen” just happened all over the city of Houston and in towns up and down the Texas coast. And four different Category 4 and 5 hurricanes were never going to make landfall within four weeks of each other until Hurricanes Harvey, Irma, Jose and Maria actually smashed all normal expectations of weather patterns.

nuclear_bomb_explosion
Not covered in your homeowners insurance policy

So, yeah, we’re buying flood insurance.

As a scary epilogue to this story, you know what else is not covered by regular homeowner’s insurance? Property damage due to nuclear war. And I know that’s never going to happen either, right? Anyway, enjoy your morning coffee with breakfast, everybody.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle.

 

 

Please see related posts:
Insurance Part 1 – Risk Transfer Only

Insurance Part 2 – The Good, The Optional, and the Bad

Insurance Part 3 – Life Insurance Calculations

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Carbon Dividends?

Conservative_case_climate_changeEarlier this month, a blue ribbon panel of US statesmen released “The Conservative Case for Carbon Dividends,” as a way to address climate change, reduce US regulations, and to provide additional funds for working-class people.

The first interesting thing about the proposal is to note the resumes of the authors, each of whom boasts serious conservative policy bonafides.

Harvard economist Martin Feldstein, Ronald Reagan’s Chairman of the Council of Economic Advisors, joined with Harvard economist Gregory Mankiw, who held the same post under George W. Bush. Hank Paulson, Treasury Secretary under W, joined with Secretaries of State James Baker (under W) and George Shultz (under Reagan). To round out the conservative business credentials, Thomas Stephenson a partner at Sequoia Capital and Rob Walton, the former Chairman of Walmart, respectively, also authored the proposal.

The proposal is bold, conservative, and has a little something for everyone.

First, something for you climate-change people.

If you’re concerned about the melting ice cap, rising sea levels, and irreversible damage worldwide, the proposal would tax carbon-emitting industries at a starting rate of $40 per ton at the point of production – such as a refinery, a coal mine, or a port. The obvious economic incentive here would be to reduce the production of carbon emissions. In addition, taxes on carbon would ratchet upward over time.

“The idea for a tax on carbon dioxide emissions from industry has been on the back-burner for a long time among climate scientists and professionals in the oil and gas business,” says Kelly Lyons, professor of Biology at Trinity University in San Antonio, “and it’s something we could all get behind.”

climate_changeThe conservative authors argue that Obama-era regulations – a mishmash of auto-industry emissions targets, punitive regulations on coal production, financial incentives for “green energy,” and the occasional symbolic pipeline-squashing – lead to business uncertainty, higher costs, and executive branch overreach. And then it’s inevitably followed by back-lash and/or repeal, as is happening now. A carbon tax, by contrast, addresses the entire problem at once and puts a known, predictable, price on carbon reductions for the entire economy.

To gain popular buy-in, next the authors propose distributing the carbon tax revenue back to American families in the form of a dividend – rather than to fund government programs. Money, obviously, appeals to wide swathes of the left and right. The proposal estimates a family of four would receive $2,000 in the first year. As the carbon tax rate increased over time, the dividends would increase as well.

The authors note the dividends would offset higher consumer costs due to the carbon tax. Just as importantly, I’d say a dividend makes for good political optics.

The Treasury Department estimates that the bottom 70 percent of households would be net beneficiaries, financially, from carbon dividends.

Third, in what I interpret as a nod to the current direction of trade policy proposals, the authors call for a “border carbon adjustment” fee that somewhat resembles proposals for something I wrote about recently, the “destination-based cash flow tax with border adjustments.” In the carbon-dividend context, however, the point of a border adjustment fee is not necessarily nationalist trade policy, but rather to nudge other countries to also get with the program of reducing their carbon emissions.

Finally, to attract the support of a traditional conservative base, the carbon dividend would almost completely replace or phase out the EPA’s suite of regulations regarding carbon dioxide emissions. The business rationale for this plan rests on the idea that less regulation, replaced by predictable market signals, would spur investment in the private sector. The authors claim the freer market approach stands in contrast to traditional Democratic solutions of larger government and greater regulation.

Ok, so let’s be real for a moment: “carbon dividends” is a clever rebranding of “carbon tax,” which forms the core of this proposal. The tax would raise costs for energy producers such as coal and oil and gas extractors.

As part of this rebranding, the authors chose the fiscally conservative approach of redistributing funds collected going back in the form of “dividends” to taxpayers, rather than using the revenue stream to fund existing government programs.

Dr. Lyons doesn’t love the dividends approach, noting that “not everyone would agree that dividends should be sent back to consumers rather than invested in research and development on solar and wind, although I can see why giving people money back makes political sense.”

Do I think this idea will pass a unified Republican Congress and Executive branch, despite its thoughtful conservative origins? A key Trump cabinet member could be a natural ally.

Rex Tillerson, Secretary of State and formerly the CEO of Exxon, has backed the idea of a carbon tax, at least when compared to a mishmash of federal regulations on the oil and gas industry.

No doubt under a Republican president Jeb Bush, John Kasich or even Marco Rubio, these blue ribbon statesman would be guiding a conservative consensus toward a cleaner energy future. But that, right there, is probably the most interesting thought inspired by this conservative proposal.

liberty_under_waterAnother way to view this carbon tax proposal would be as a reminder – and a metaphor for – the true power of Establishment Republicans right now.

Shultz. Baker. Feldstein. Paulson. Mankiw. That’s a batting order of heavy hitters, a murderer’s row of Republican Statesmen. They made the Reagan administration what it was. They made the Bush Administrations what they were.

Which is to say, the Republican Establishment is now like a coastal city of the future, swamped and under water. The Establishment has been covered by the rising tide and heated rhetoric of an “America First” populism that disdains markets, globalization, and science.

I’d say this thoughtful conservative idea doesn’t have a snowball’s chance in Haiti of ever becoming law.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related post:

Border-adjustment Tax – An untested idea

 

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