While many residents in the mid-Atlantic breathed a sigh of relief as Hurricane Joaquin stayed largely out to sea, our fellow Americans in the Carolinas were not so lucky. Their plight is rightfully the focus of federal, state, and local agencies now, which can offer vital assistance at a terrible time.
As with past disasters, Joaquin is a reminder of what governments can do to help people get back on their feet. The private sector has a pivotal role in this process too, and here it’s just as important for governments to recognize what they shouldn’t do as well as what they should. In many cases, seemingly minor policy details can make a massive difference.
For example, the chronically indebted National Flood Insurance Program (NFIP) has long suffered from poor underwriting practices that fail to properly account for risks in setting premiums. In 2014 lawmakers managed to weaken some key pro-taxpayer reforms they had enacted just two years prior, even though taxpayers were already on the hook for approximately $24 billion in NFIP debts.
There are several remedies to this problem, and they’re grounded in the principle that free markets can deliver more choices and lower prices for consumers. A first step is to encourage competition outside of the old, broken federal model, through passage of the “Flood Insurance Market Parity and Modernization Act.” This bipartisan legislation, sponsored by Reps. Dennis Ross (R-FL) and Patrick Murphy (D-FL) in the House and Dean Heller (R-NV) and Jon Tester (D-MT) in the Senate, would clarify the federal definition of “acceptable” flood insurance coverage for loan purposes to essentially mean a policy that’s overseen by a state regulatory agency.
By seeking to “reassure lenders and consumers about the validity of privately issued flood insurance” (in the sponsors’ words), and by removing what was perceived as a potential barrier to entry for private products, this legislation could help to take the fiscal pressure off NFIP and taxpayers. This small change could have major benefits.
On the other hand, Congress and the White House must avoid making a change in current policy that could drastically curtail the availability of this and other types of disaster coverage. (e.g., for wind, or earthquakes). In discussions over matters ranging from deficit reduction to tax reform, questions desperately turn to finding ways to “pay for” irresponsible policymaking. One wrong answer, which NTU has warned against for several years now: stripping reinsurers that diversify abroad of a tax deduction that has equivalent provisions throughout industry.
Reinsurance – a secondary insurance market – is a time-tested product that helps to absorb the costs of massive insurable events. Foreign-affiliate reinsurance allows the costs, and the risks, of mega-disasters to be distributed around the world, allowing individuals and businesses here to purchase policies they can afford. Slap a discriminatory tax penalty on this vital component of insurance, and we will get less of it: that translates to fewer (or even no) lines of coverage and higher rates.
Last year an NTU op-ed noted that by one analysis, Florida residents alone could shoulder $530 million in additional insurance costs if such a short-sighted policy were enacted. A subsequent study from the Tax Foundation showed that the reinsurance tax hike would actually cost the private economy four dollars for every dollar in revenue raised, while an assessment by economist Art Laffer concluded that the scheme “involves trade protectionism implemented through the tax system.”
Although the progress (or hopefully lack of it) with the reinsurance tax hike is driven by Congress and the President, every large natural disaster should give taxpayers pause to recognize what they have to lose if Washington is allowed to sever this lifeline to a faster, fuller recovery from adverse events.