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August 25
10:48 2017

Public Policy Analysis & Opinion

House Financial Services Committee is no longer a serious venue for policy development

This conflict is not a typical Republican versus Democrat food fight. No, this altercation pits House Republicans against Republicans in the Senate.

In the past 30 years, this observer has read and heard his share of rants from policymakers who felt constrained by the legislative process. Most of those colorful statements came from individuals or at least party caucuses.

Statements by legislative committees tend to try to echo the old “Dragnet” exhortation: “Just the facts, ma’am.” As a literary genre, the congressional committee news release often lacks drama.

Oh, but that observation cannot be applied to anews release issued by the House Financial ServicesCommittee on June 23, 2017. United States Representative Jeb Hensarling (R-Texas) chairs the committee.

Of course, the NFIP came into existence because private insurance carriers would not offer products that transferred flood risk. As the summer of 2017 warmed, the rhetoric that frames the debate over reauthorization of the National Flood Insurance Program (NFIP) also heated up.

The committee’s statement began with the interesting observation: A classic example of government dysfunction is a federal insurance program that helps pay to drain basements in millions of America’s second homes.

What followed was a populist rant worthy of William Jennings Bryan, “Fighting Bob” La Follette, or Fiorello LaGuardia. The statement continued:

One reason for the hole is that about 20% of policies are directly subsidized. More than 75% of such policies are in counties in the top 30% for home values, according to a Government Accountability Office analysis, and many dot the affluent coasts of Florida, California, and Texas. In other words, this is a wealth transfer from low and middle-income families to the folks who own real estate on Nantucket.

The release goes further. It explains that a “2012 law phased out subsidies when a home is sold to a new owner, among other improvements, though the real-estate lobby staged a meltdown.”

The savage truth-telling continued when the statement of a Republican-led committee tarred the party’s record on the flood insurance issue: “A Republican Congress repealed the measure in 2014 and instead hit all policyholders with a new surcharge.”

In the High Season of the Watergate scandal, Patrick J. Buchanan, then a communications aide to President Nixon, compared his boss’s situation to that of Sisyphus. Buchanan’s reference focused on the hopeless situation confronted by the mythical King of Ephyra, who served an eternal penance of pushing a large boulder up a hill, only to have it roll back toward him and force him to start over again. (Buchanan did not make clear whether his comparison of Nixon to Sisyphus included the corruptions that led to the king’s punishment: self-aggrandizing craftiness and deceitfulness.)

Sure enough, the committee’s statement compares its chair to Sisyphus. “Financial Services Chairman Jeb Hensarling fought the repeal and is now pushing this rock up the hill again.”

That effort focuses on making the NFIP product more expensive while encouraging private-sector alternatives.

Of course, the NFIP came into existence because private insurance carriers would not offer products that transferred flood risk.

“A House bill from Rep. Sean Duffy (R-Wis.) would require 8% annual premium increases for certain policies, and premiums are supposed to be a proxy for liability.” In addition, the House bills “force FEMA to raise collection rates for a reserve fund by 1% each year until there’s more cash to weather the next Hurricane Sandy or other big payout, as law requires.”

In addition, the statement released in the name of the House Financial Services Committee suggests: “Another good idea is shutting off the spigot for new subsidies. The House package would bar policies for certain expensive or risky new homes, effective 2021.”

The committee’s statement also makes clear that someone in the public relations department just heard of Kansas. The statement contains little evidence that the author of the news release has ever visited the Sunflower State, but they seem convinced that the Kansans never suffer a flood.

Having established that the rivers and streams of Kansas never flood, the House committee statement laments the lack of private flood insurance available to extra-security-minded Jayhawkers. “The House bills also remove barriers to private competition. This would be great for families on the plains of Kansas, who subsidize policies in more risky areas.”

Although these arguments represent a pretty good attempt to echo old-time progressive populism, they ignore the insurance mechanism’s inherent public good. As the Supreme Court ruled in German Alliance Insurance Co. v. Kansas Insurance Commissioner Lewis (1914), citizens do not have to suffer a physical loss to benefit from an insurance mechanism’s restoration of economic loss, so the court opined that there is a public good inherent in all insurance mechanisms.

For example, so long as workers at the Port of New Orleans could not operate at full capacity because workers, managers, or vendors could not live in their homes or enter their businesses because of flood damage, Kansas farmers’ crops could not efficiently make it to world markets. Flood insurance helps those who suffer direct losses and those in the stream of commerce who depend on the restoration of damaged facilities.

The insurance mechanism spreads the risk of financial loss across the largest possible population of those who face economic losses from covered perils and occurrences—not just those who suffer physical damage. Concentrating the risk runs counter to the concept of an insurance mechanism.

Oh yes, the time-honored-totem of “private competition.” That Deus Ex Machina works its way into so many dramatic productions, but not in the real world.

Of course, before the NFIP existed, private insurance carriers had the flood insurance market all to themselves—and did not write policies. Or the insurers wrote policies that they offered only to the most lucrative clients, who presented little risk of financial loss. Still others offered contracts that they called flood policies, but rarely paid claims. The policies’ many odd definitions, broad exclusions, and savage deductibles led only to agents and brokers receiving angry phone calls.

In response to the private market’s inability to meet the public need for rebuilding and restoration after floods, Congress would dip into the public treasury to fund recovery efforts on an ad hoc basis.

To correct the problem, Congress enacted the NFIP. The program consists of an insurance mechanism that spreads the risk of loss across a large population of citizens who face financial loss from flood events. By creating a social insurance mechanism, Congress filled a void left by the private sector and removed the politics associated with passing emergency legislation. Also, the program instituted risk mitigation programs aimed at reducing financial losses suffered by flooded communities and interstate commerce.

Thankfully, in the Senate Banking Committee, Chairman Mike Crapo (R-Idaho) and ranking minority party member Sherrod Brown (D-Ohio) began work early on a bipartisan effort to reauthorize and improve the NFIP.

The committee’s deliberations have focused on improving the financial condition of the program based on risk mitigation. For example, the proceedings looked at technological means to improve the program’s mapping to more accurately measure, transfer, or mitigate flood risk.

The statement of the House Financial Services Committee even managed to take a rhetorical swing at the Senate’s bipartisanship:

If [the House-proposed] changes seem modest, they read like Ayn Rand compared with ideas in the Senate, where Marco Rubio (R., Florida Gold Coast) and Elizabeth Warren (D., Cape Cod) have teamed up to protect rich home owners. Their plan would suspend interest on the program’s debt, among other plugs. An open question is whether any improvement can pass the Senate Banking Committee, where Republicans with a one-vote majority will have to persuade Senator John Kennedy of flood-prone Louisiana.

Consider the previous paragraph and compare it to the conversation that arose from the adults’ table. Senator Crapo observed: “Ranking member Brown and I have started working together on a bipartisan basis to hear the thoughts and concerns of various stakeholders and members of the committee.” Senator Brown, who has a well-earned reputation as a progressive populist, said: “I look forward to continuing to work with Chairman Crapo and the members of the committee to strengthen the NFIP and the country’s comprehensive approach to mitigating flood risk through a timely reauthorization.”

At a May 4, 2017, committee hearing on reauthorization bill, Senator Brown expressed a “fair and balanced” understanding of the need for reasoned Congressional action. To address this risk of financial loss caused by floods, Senator Brown described the NFIP as consisting of four elements: 1) flood insurance, (2) flood plain management, (3) flood plain mapping, and (4) mitigation.

Senator Brown recognized that coastal areas carry a concentration of risk, but he noted the national scope of even direct flood-related losses: “The sheer power of heavy rainfall, combined with a river, stream, or other body of water, can have tragic, costly results, as we’re seeing right now in the Midwest.

“With a growing population and a changing climate, our entire nation will continue to grapple with this issue in the years ahead,” said Senator Brown.

In contrast to the understanding communicated by Senators Crapo and Brown, the closing paragraph of the House Financial Services Committee news release sounds desperate:

Congress will have to pass something by the fall or risk a lapse that disrupts the real estate market. The best reform would be to convert the program into a private operation, though members of both parties would pile together like sandbags to block it. So credit to Mr. Hensarling and his colleagues for proposals that would at least start to impose some market discipline.

Who knows: Maybe we won’t have Mr. Hensarling “to kick around anymore.”

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advoca

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