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Insurance reforms beached – for now

The Senate conducted an experiment in the politics of governmental reform last week, and the results were not encouraging.

At issue is the National Flood Insurance Program, which sells subsidized coverage against inundation for homes and businesses, both coastal and inland. Home buyers in designated flood-prone areas must buy this insurance to qualify for government-backed mortgages, and as of the end of fiscal 2012, the NFIP sponsored 5.5 million policies with a total insured value of $1.3 trillion.

Alas, storms such as Katrina and Sandy have caused the NFIP to cover huge losses, which forced it to go into debt to the tune of $24 billion owed to the U.S. Treasury. It’s a classic case of moral hazard: Subsidized protection against risky behavior – such as building in a flood plain – encourages people to take risks, with the inevitable losses that entails.

The NFIP disproportionately benefits the well-to-do, who tend to be more likely to buy beachfront property. According to a 2007 Congressional Budget Office survey, 40 percent of subsidized coastal properties were worth more than $500,000; 12 percent were worth more than $1 million. Almost a quarter of these properties were vacation homes, many of them rentals.

The program’s debt, inefficiency and inequity finally prompted Congress to reform it in 2012, via a law that called for the phaseout of subsidized insurance for second homes and repeatedly flooded properties, a phased-in premium increase and $400 million in annual budget authority to modernize the flood-zone map.

But last week, the Senate voted 67-32 to gut that promising and necessary measure. The NFIP’s middle- and upper-class clientele suffered sticker shock upon receipt of their insurance bills, and they went running to Congress for relief.

The unhappiness was concentrated in Sandy-socked New York and New Jersey; Democratic Sen. Robert Menendez of the latter state, along with Republican Johnny Isakson of Georgia, a reliable ally of the real estate industry, co-sponsored the bill, which delays implementation of the higher rates. According to a White House statement, this “would further erode the financial position of the NFIP,” i.e., make it even less capable of paying its massive debt without a taxpayer bailout.

There should be some sympathy for property owners who were encouraged to move into flood zones by the NFIP. Like many other federal insurance, loan guarantee and subsidy programs, this one has worked its way into the property valuations upon which millions of voters depend.

Still, it takes some chutzpah for NFIP beneficiaries to act entitled to subsidies from the vast majority of taxpayers who chose not to live on the beach – or who never could afford it in the first place. Now it’s up the Obama administration and the House to stand up for the majority and salvage the hard-won reforms that the Senate abandoned.

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