Why ‘cherry-picking’ is the solution to our nation’s flood insurance disaster

No, the solution to the nation’s flood insurance problem won’t involve picking fruit – except, perhaps, in a metaphorical sense. However, in the search for answers to our nation’s flood insurance predicament, it is important to correct a misunderstanding of the term “cherry-picking.” 

Some argue that existing customers of the National Flood Insurance Program (NFIP) should not be allowed to purchase better coverage or pay lower prices in the private market, lest the $5.5 billion monopoly be left to insure only the “worst” risks. Far from being a bad idea, this is exactly what we must do to permanently correct America’s flood insurance woes. The monopolistic approach has failed. It’s time to start fixing it.

{mosads}Assuring consumer access to more accurately priced, higher-value, private-market flood insurance through cherry-picking is the answer. Seen in the light of experience, cherry-picking is clearly the single most effective thing we can do to correct a well-intended but structurally terminal tax payer-funded monopoly. As it stands, the NFIP charges unfair premiums to virtually all of its customers, has produced an appalling number of unfairly adjusted claims and is about $25 billion in debt to U.S. taxpayers.

Save Everyone Money or Preserve A Failed Government Monopoly

As a government-sponsored monopoly, NFIP insurance rates have been misshaped by political forces, and, as a monopoly, it is tremendously slow and inefficient; not a formula for success against the extreme unpredictability of flood risk. In its last published Actuarial Rate Review, the NFIP said: “High-severity, low-frequency events such as floods, hurricanes, and earthquakes do not lend themselves to traditional actuarial pricing techniques. Results vary dramatically from year to year… and average results have little predictive value even when gathered over a long period of time.”

The NFIP monopoly concentrates this unpredictability on American taxpayers and policyholders, but the private market spreads risk worldwide. This smooths predictability curves. A recent study showed that NFIP rates randomly overcharge about 50 percent of policyholders and randomly undercharge the remaining roughly 50 percent. Under the concept of cherry-picking, private market insurers – given a level playing field – will identify these overcharged policyholders and offer them a fairer price. At the same time, denied its monopoly, the NFIP will be forced to increase efficiency, trim wasteful costs and charge fairer rates.

Flood insurance affordability, even after costs have been driven down by the private market, will always be an issue for some. After meeting a means test to prove their need, these homeowners should be subsidized in a transparent fashion, so they are not randomly over or undercharged as they now are. Additionally, the NFIP must stop the practice of subsidizing the wealthy at the expense of taxpayers and overcharged policyholders.

Fueling its own demise, the NFIP has also, for years, paid to rebuild the same properties repeatedly. The remaining policyholders, along with taxpayers, are then forced to foot the bill. This one percent of the NFIP’s policyholder base, could have been bought out or had their properties mitigated several times over when compared with the losses they have generated. Cherry-picking will force the NFIP to do what should have done decades ago: buy or mitigate these properties to the benefit of all.

Over the years, all 50 states have faced one or more insurance availability crises and their solutions have all involved cherry-picking. To solve these crises, the states created “take all comers” insurers, and then at some point encouraged the private market to cherry-pick until the problem became manageable or simply ceased to exist. With more than 100 successful state precedents, shouldn’t we all embrace cherry-picking?

Time to Act

Cherry-picking is the essence of any free market. We cherry-pick in the grocery store, the stock market, and the drug store. Private flood insurers, backed by the power of the free market, will automatically reform flood insurance by lowering rates for policyholders through efficiency and competition.

Sens. Dean Heller (R-Nev.), and Jon Tester (D-Mont.) and Reps. Dennis Ross (R-Fla.) and Kathy Castor (D-Fla.) have introduced legislation known as the Private Flood Insurance Market Development Act of 2017, (S. 1679 and H.R. 1422) – legislation that passed in the House unanimously in April 2016. This legislation is needed to bring fair rates to flood insurance and give consumers the choices they deserve.

The NFIP will be a necessary part of America’s flood insurance solution for decades to come, but the NFIP will serve America best as a backstop to the private market, not as an isolated monopoly. Cherry-picking will transform the NFIP into a backstop entity that insures a relatively small number of high-risk structures, sustains a small fraction of its former losses, and focuses on repurposing or mitigating high-risk structures.

Congress should immediately pass this legislation. If they do, we will see fairer, more appropriate flood insurance rates, more incentives for flood risk mitigation, more accurate flood maps and risk assessment methods and a dramatic reduction in the flood insurance burden imposed on taxpayers.

Craig Poulton is chief executive officer of Salt Lake City-based Poulton Associates, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATcoverage.com.

The views expressed by this author are their own and are not the views of The Hill.