Houston’s mid-January flooding was only the latest episode in the city’s long running saga of submersion, in which widespread, arguably avoidable, damage is commonplace.
With the city borrowing $43 million to assist in relief efforts, it’s an exceptional time in the flood insurance market.
The indebted National Flood Insurance Program (NFIP) is up for review by Congress in September and calls for further privatization of the market are growing louder as technological solutions to flood prevention become more evident.
But what’s the alternative?
Related: Check out Flood Risk 2017 – Florida – a master class
Poulton Associates runs the privately underwritten Natural Catastrophe Insurance Program (NCIP) and advertises itself as the only web based natural disaster insurance in America.
The CEO of Poulton Associates, Craig Poulton argues that the (public) NFIP doesn’t incentivize risk mitigation but instead spreads the pricing so thin it encourages building on flood plains.
“When you segregate risk, when you stratify risk, you incentivise better behaviour. In this (Houston’s) case, you build buildings with flood vents in the crawl spaces,” Poulton said.
“As long as the NFIP doesn’t incentivize flood vents, no-one’s going to pay to put them in.”
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Poulton described the NFIP as incentivizing a “perverse behaviour,” citing parishes affected by Hurricane Katrina being put in the same pricing bracket as properties with much lower risk.
“We (the private NCIP) can look at your home and we can make certain determinations about your home without you even talking to us,” Poulton said.
“Then we can offer those a lower rate who deserve a lower rate, and those a higher rate who deserve a higher rate on a granular level.”
The founder of the (private) NCIP made the point that, 50 years ago, most Americans paid similar auto insurance premiums, spreading the risk evenly among a large pool.
But
State Farm changed that and incentivized safer driving with lower premiums and more stringent applications, something that should happen to flood insurance according to Poulton.
“When you stratify, you have to have an insurer of last resort, and our belief is the perfect insurer of last resort is the NFIP,” Poulton said.
“And if it were to begin to act like an insurer of last resort instead of a monopoly trying to maintain its position, then private insurers would flood in (pardon the pun) and fill in that stratification one element at a time.”
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