Last week tens of thousands of families and businesses were spared a cold bucket of water to the face - no joke intended - when the implementation of reforms to the National Flood Insurance Program was postponed.
Still reeling from the destruction caused by Hurricane Katrina and Hurricane Sandy, the NFIP two years ago finally succumbed to the financial pressures it had been under for decades. On the verge of the system’s collapse, a minor miracle occurred in 2012 when Congress came together in a bipartisan effort and passed the Biggert-Waters Act, legislation that sought to make the NFIP solvent again.
But a funny thing happened to collecting enough premiums to make flood insurance “affordable.”
Last fall when insurance premium bills started arriving in policy holders’ mail boxes, people saw the costs jumping up dramatically. Suddenly homes and businesses in flood zones were less attractive. Some owners could not afford the new rates. Others tried to leave but discovered the higher premiums lowered the value of the buildings. So, last Thursday, legislation was passed that capped all premium increases at no more than 18 percent for the upcoming year. Full phase-in of the reforms will take place over a four-year period but analysts are already predicting the cap will restrict the premiums too much over that time, leaving the insurance industry in the same predicament it is in today.
And therein lies the problem.
For decades the federal government has subsidized the premiums in the NFIP to keep the costs down to policy holders. The unintended consequence was the less expensive premiums encouraged the over-development of flood zones. Now any time a large natural disaster hits, like a hurricane, the federal government is on the hook for millions of dollars of underpayment.
The problems with the National Flood Insurance Program also points out issues with another federally run program: the Affordable Care Act (Obamacare).
Just as with the NFIP, the government is subsidizing premium payments for many people who are signing in for insurance plans. This creates a false market and does not allow the public to understand the true value of what they are using. Just like the NFIP, that gap between what the public is paying and what the government is subsidizing will continue to grow, adding billions of dollars in deficit spending.
Time is also a factor. By extending the implementation time called for under the Biggert-Waters Act, analysts say premiums will rise even faster at some point in the future. The country should also expect the same thing out of all the delays to the ACA. Health industry officials this week said all the delays will add to the costs later on and now they expect premiums in many parts of the country to double once full implementation has occurred. One state insurance department director said he expected his state’s premiums to triple.
So much for the “affordable” part of the Affordable Care Act.
Should the federal government be involved with the regulation of industries? Yes. Should government agencies monitor for abuses? Absolutely yes. Should the government set monetary values in the open market? No.
The U.S. economy has thrived for centuries under a free market system. That means consumers set the value of goods and services. If a product is too expensive, they will not purchase it and businesses will lower their prices to the point where the economy will support them. That is the balance we lack when the government becomes involved with pricing.